Will inflation data heighten or calm Fed fears?

September 29, 2017 11:42 AM

U.S. equity markets are expected to open relatively unchanged from Thursday as we await the release of some important inflation data, as well as other key U.S. economic metrics.

The inflation data clearly stands out today as, despite it coming a couple of weeks after the CPI numbers for the same month, it is the Federal Reserve’s preferred measure of inflation as comes as policy makers appear uncertain about the correct approach to interest rates. The central bank recently claimed that it still intends to raise rates one more time this year with support among policy makers for such a move actually increasing and yet, the tone coming from officials themselves suggests there’s a serious lack of conviction.

Concerns about inflation not progressing towards target are clearly increasing among some of the more dovish policy makers at the Fed and another weak reading today won’t help matters. Should we see some improvement, as is expected with the PCE price index seen rising to 1.5% from 1.4%, it may be just enough to get one more rate hike over the line in December, assuming of course that it doesn’t reverse course again over the next couple of months.

Personal income and spending figures will also be released alongside the inflation data, both of which are also important metrics as it offers some insight into possible future inflationary trends and economic performance. It’s no secret that the U.S. economy is driven by the consumer, so higher incomes and spending should make the Fed’s job that much easier. The University of Michigan Consumer Sentiment Survey should also provide some insight into this.

The pound has come under some pressure on Friday having previously been on a great run on the anticipation that the Bank of England will raise interest rates this year. Softer GDP data for the second quarter of 1.5%, down from previous estimates of 1.7%, triggered the slide in the pound, which was already looking a little vulnerable following recent moves. While the downside looks limited as long as the BoE follows through on rate hike plans, a sustained move above 1.36 against the dollar also looks a little far-fetched on the possibility of one hike and very gradual hikes thereafter.

Interestingly, the IBEX is the only major European index trading in the red this morning as we head into a weekend in which Catalonia is planning an illegal independence referendum. While the outcome of the referendum, should it go ahead, is unlikely to change anything in the near-term, if at all, there is clearly a little caution about what the outcome will do to investor sentiment in the region and whether it could trigger a series of events that ultimately leads to it gaining independence. As it is, I don’t see much threat from this weekend’s referendum and there’s a good chance that efforts to stop it from Madrid will be successful.

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