US Inflation Rises to Highest Since 2014

Daily Analysis - 16/12/2016

Consumer Prices Continue to Accelerate Higher Amid Strong Tailwinds from Rising Energy Prices

Improving US fundamentals like inflation have accompanied the latest US rate hike, paving the way for additional policy tightening from the Federal Reserve should consumer prices continues to trend near the targeted 2.00% over the medium-term.

US CPI Climb Bolsters Outlook

In another sign of broad-based improvements in the United States, the latest headline inflation figures released by the US Bureau of Labor Statistics showed consumer prices rising by 1.70% on an annualized basis in November. Besides marking the fastest pace of price growth since October of 2014, it gives the Federal Reserve some more breathing room to raise interest rates as proposed during the latest FOMC statement. The predominant driver of the latest gains was the resurgence in energy prices while food prices continue to fall. Energy costs rose by 1.10% year over year while the cost of food decreased by -0.40% over the same period, declining for three straight months. The US dollar continued its ascent versus major peers, with the EURUSD pair falling below 1.0400 to its lowest point since 2003 before managing to retake the level and rebound modestly overnight.

Mexican Peso Climbs Following Larger Than Anticipated Rate Hike

For the fifth time in 2016, Banco de Mexico has chosen to raise interest rates, with the benchmark increased by 50 basis points past the consensus estimates of 5.50% to 5.75%. This year alone, the Central Bank has lifted rates by 250 basis points. As the Peso falls, the Central Bank has been forced to be more aggressive in a bid to strengthen the currency, reduce capital flight, and fight rising inflation. According to data reported last week, Mexican consumer prices climbed to a 2-year high of 3.31% year over year through the end of November, outpacing the 3.00% targeted by the Central Bank. In response to the hike, the Peso strengthened moderately on Thursday, falling from intraday highs of 20.6904 to 20.3272 by the close of trading.

Swiss National Bank Set to Remain Accommodative

As expected, the Swiss National Bank opted to leave monetary policy unchanged, with interest rates held at a record low -0.75%. Although SNB President Thomas Jordan was optimistic when speaking about the move by the Federal Reserve to raise interest rates, political developments remain concerning. During remarks on Thursday, Jordan highlighted the benefit of monetary policy moving towards gradual normalization. However, the SNB highlighted that they are willing to accommodate policy even further while continuing to intervene in the foreign exchange market to spur inflation and offset Franc strength. Jordan reiterated this point by not ruling out the possibility of reducing interest rates from current levels as the weakness in the Euro puts new external pressure on the alpine nation’s economy. After falling the last three sessions amid weakness in the Euro, EURCHF is trending modestly higher on the session.

Bank of England Holds Fast Amid Mixed Risks

In keeping with the general sentiment among advanced economies, the Bank of England was upbeat about the latest US rate hike while refraining from adjusting interest rates locally during the latest Monetary Policy Committee decision. Although inflation continues to climb after reaching a 2-year high in November while unemployment sits at an 11-year low, the Central Bank reiterated that monetary policy could be adjusted in either direction depending on how conditions evolve. Inflation is expected to return to the 2.00% target within the first six months of 2017, hurting the prospects of further rate cuts. However, emerging markets such as China continue to be viewed as a risk factor alongside Brexit negotiations, potentially necessitating further accommodation. The Pound was mostly unchanged against the Euro following the decision, with EURGBP trading relatively flat on the week.