Inflation data Ahead

Daily Analysis - 13/03/2018

CPI hint of Fed Direction


US CPI is highly anticipated from market participants to draw clues of the Fed’s future policy path. Equities on the other hand are mixed mainly due to the uncertainty of Trump’s tariffs as oil drops.

Mixed effect Equities Market

Today, Asian stocks edged higher with technology shares supported by gains in their Wall Street peers. Gains were limited ahead of U.S. inflation data which could offer clues on the pace of interest rate hikes this year.

The Dow Jones 30 fell on Monday as investors remain on the edge for a potential global trade war since President Donald Trump implemented tariffs on steel and aluminum imports last week. Boeing, Caterpillar and United Technologies all fell more than 2%. Earlier in the session, Dow 30 rose more than 100 points as shares of Apple and Goldman Sachs reached all-time highs.

The S&P 500 Index slipped 0.13% overnight following its biggest rally in five weeks that was spurred by Friday’s better-than-expected jobs report, with industrials dropping 1.3%. Meanwhile, a rise in tech stocks boosted the Nasdaq to a new record high. The tech-heavy index gained 0.36% to reach a record as Apple recovered its losses from last month's correction.

Global indexes fell more than 10% last month, marking the first correction of that size since 2016. The correction was sparked, by fears that higher inflation and an overheated economy could push the Federal Reserve to tighten monetary policy faster than the market had priced it in. Inflation fears eased Friday as wage-growth was below economists’ forecasts.


CPI from the US is on the headlines

Investors are looking to American inflation and retail sales data coming out this week. The U.S. CPI is the best gauge of inflation ahead of next week’s Federal Reserve’s policy meeting.

CPI data for February is expected to have ticked up to +2.2% year-over-year from +2.1% previously, while the core CPI is expected to have remained flat at +1.8%. Inflation remains on the front seat of concerns within the financial community. The market turbulence experienced in early February was triggered by fears of inflation rising faster than previously anticipated, which could lead to faster rate hikes by the Fed. Powell’s hawkish remarks before Congress, strengthened the case for a fourth hike this year, led to a similar market response, though to a much lesser extent.

Accelerating inflation could strengthen further the chances for a 4th rate hike by the Fed in 2018, which could potentially trigger another round of risk aversion. As of now, the probability for a 4th rate hike is around 27%. On the other hand, a slowdown could have the opposite market effect, as investors may scale back somewhat their four-hike expectations. Nevertheless, investors and traders started pricing in the case for a 4th rate increase by the Fed.


Oil prices dip

Oil prices extended losses on Tuesday as the unstoppable rise in U.S. crude output weighed on markets.

Crude Oil, which is the U.S. West Texas Intermediate (WTI), futures were down 0.3% from their previous close. Crude oil and Brent dropped by around 1% in their Monday sessions.

Further price falls were prevented mainly due to healthy demand and ongoing supply limitation by producers led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

Traders fear oil prices could not be further increased due to a soaring US crude oil production, which surged above 10 million barrels per day (bpd) in late 2017, even above top exporter Saudi Arabia. According to the International Energy Agency (IEA), the expectations are for the U.S. crude production to rise above 11 million bpd by late 2018, taking even the top place from Russia.

Another main factor economists study regarding the rising U.S. output comes largely on the back of onshore shale oil production. U.S. crude production from major shale formations is expected to rise by 131,000 bpd in April from the previous month to a record 6.95 million bpd, the U.S. Energy Information Administration (EIA) said in a monthly report on Monday.


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