The two largest economies in the world will be providing their inflation numbers next week.
Normally, this would be a major event that would rile up markets. However, with monetary policymakers focusing on other things, the markets are likely to take the news report itself with relative calm.
What is likely to drive exchange rates and even the stock market at this point is expectations.
Like all countries, China engaged in some significant stimulus spending to deal with COVID. However, as a percentage of their GDP, it’s quite a bit less than in other countries.
Additionally, China’s stimulus has been in the form of focused infrastructure building, unlike broad liquidity injections in the US.
But despite the differences, consumer prices have broadly followed the same pattern around the world.
Where’s the Stimulus
The Fed’s policy projections factored in additional stimulus spending from the government.
It seemed the logical thing to do, but political priorities have stymied the flow of cash.
President Trump’s tweet called off negotiations of further stimulus until after the election. This seemed to be a graphic representation of a reality already being factored in by many analysts.
There was too much to be gained from political wrangling on a potential stimulus bill for it to pass before Americans went to the polls.
Naturally, we’d expect this to put pressure on the Fed. We’d expect the Fed to step in to provide the economic support that politicians didn’t.
For their part, though, FOMC members are likely factoring in the calculus that getting a stimulus bill through after November 3 is likely to be significantly easier.
Therefore, the focus of policy is to talk about inflation expectations next year, while waiting until the next meeting to assess the situation.
What We Are Looking For
For the US, projections are for September CPI to slow further to 0.2% monthly compared to 0.4% in August.
This would give the Fed increased breathing room for further easing if they so choose. We can expect annualized inflation to come in at 1.2% compared to 1.3% prior.
The headline-making point is likely to be the CPI Change ex Food and Energy (core). That’s because this is what the Fed usually tracks.
Projections are for it to come in at 0.2% monthly compared to 0.4% prior.
The Asian Giant Situation
Expectations are for the Chinese September CPI to remain at the same rate as the prior month, with the monthly change at 0.4%, and the annualized change at 2.4%.
We should remember that Chinese CPI had spiked earlier in the year due to supply issues related to COVID and flooding.
Over the last months, Chinese inflation has been plagued by increased food costs, particularly with pork prices. The latest series of typhoons and flooding in the Yangtze valley has cut expected grain production needed to feed hogs.
This potentially increases the need for more imports.
Press reports have shown Chinese authorities engaging in campaigns to reduce “overconsumption” of food, with restaurants being fined for offering “too large” portions. However, authorities stress there is no issue with supply.
