Tomorrow we get one of the key bits of data that is likely to drive currency moves for the next couple of years: US Inflation Data.
December saw the US fall back on its recovery from covid as new cases peaked to record highs. So, it’s not surprising should some of the economic dynamics have fallen back to pandemic levels.
But the more pressing issue right now is where the market sees inflation going.
The Dollar Index has been rising for a few days. This is mostly due to a return of risk-off sentiment, and expectation of higher interest rates.
US bond yields have gone higher, increasing demand for the currency and depressing growth in the stock market. And that is related to inflation expectations, which is why even though the Fed is concentrating more on employment, for now, we still need to pay attention to CPI figures.
What we are looking for
There is a rush of different CPI data coming out at the same time. But the two bits we want to pay attention to are the CPI ex-food and energy on an annualized and monthly basis.
Those are the ones the Fed follows. Therefore, the markets follow them too. So, under the current circumstances, these are what are most likely to move the markets.
The current market consensus of expectations is based on last month’s view that inflation would remain generally low this year.
The pandemic was understood to keep things like house prices (rents) and energy prices low. Also, the expectation of interest staying low until well into 2023 would reduce the costs of capital and overhead.
But that changed a bit on Jan 6th.
November had an unusually high inflation component, so the market is expecting CPI to “settle down” at this reading.
The monthly Consumer Price Index excluding food and energy is projected to have grown just 0.1% last month, compared to 0.2% in November.
This would be in line with the now several years of generally low inflation that has kept interest rates down since the prior recession.
Yearly CPI ex food and energy is expected to remain stable at 1.6%, the same as prior month, below what used to be the Fed’s 2.0% inflation target.
Where we go from here
Once vaccines are rolled out, it’s expected that inflation dynamics will change.
Travel restrictions and rent freezes have kept energy and housing prices from rising at their usual levels. On the other hand, low interest rates have pushed the price of cars and houses above traditional rates.
Inflation is also being kept low by weaker energy prices. But with a new geopolitical landscape in the Middle East starting on Jan 20, there is no guarantee that scenario continues.
Just yesterday, reports surfaced that the new Biden administration is uncomfortable with setting a goal of 100M vaccinations in the first 100 days.
The US needs to achieve the order of 170M vaccines before epidemiologists feel comfortable recommending an end to lockdowns.
But if government projections suggest that by mid-April that its unlikely to even achieve 100M… it might be well beyond May before the pandemic dynamic in inflation (and the markets) change.