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CPI, Labor Data Confirm Fed’s Sanity

Matt Eidinger October 11, 2018

The US consumer price index increased 0.1% during the month of September, slightly disappointing market expectations set at 0.2%. On a year-over-year basis, headline CPI grew at 2.3%, also slightly lower than the 2.4% that economists had forecast.

Stripping out the volatile fuel and energy sectors, core CPI rose by 0.1% during last month and 2.2% on an annualized basis The energy index declined 0.5% in September, in contrast to a 1.9% increase in August, mostly as a result of decreased prices in energy services.

Although the US Federal Reserve prefers using personal consumption expenditures (PCE) as a tool for measuring how close inflation is to its 2% target, today’s CPI data aligns well with the 2.2% PCE inflation figures the Bureau of Economic Analysis released for August.

Stability remains the best friend of the Dollar Index (DXY), which displayed a mild reaction to the data this morning, falling a mere 0.1% in the wake of the release.

Additionally, according to the CME Group, the prospects of a Fed interest rate increase in December are currently 79.7%, virtually identical right before the CPI release. Furthermore, markets currently expect the first interest rate increases of 2019 at either the March or May FOMC meeting.

Despite the IMF downgrading its forecast for global economic growth earlier this week, financial markets were relatively calm until Wednesday afternoon. Rising bond yields and falling oil prices induced some volatility into asset markets including FX yesterday, prompting the USD to rise rapidly against the CAD. The dollar/loonie pairing was about 20 bps lower this morning immediately after the release.

Markets are poised for another wild ride today after President Trump commented that the Federal Reserve had “gone crazy” with its tightening of monetary policy. These remarks caused the probability of a December interest rate hike from the Fed to plunge below 80% overnight.

Finally, at the Department of Labor, seasonally adjusted initial jobless claims rose to 214,000 during the week ending October 6th. This is slightly worse than market expectations, which were set at 210,000 new claims and 7,000 higher than last week’s figures.

Bottom Line: Although both data points were slightly worse than expected, today’s CPI data indicates that inflation is still near the Federal Reserve’s 2% target, while the unemployment data indicate a healthy labor market that is hovering near full employment and responding well to rising interest rates. Despite recent political rhetoric from the US president, today’s data clearly demonstrate the Federal Reserve is not “loco” as Donald Trump believes and is on track to raise interest rates in December.

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