US: Low trend inflation = structurally low yields = good news for EM FX - ING
|Viraj Patel, Research Analyst at ING, explains that the Sep FOMC minutes saw a marked shift in discussions between Fed officials towards embracing the idea that secular forces could in fact be plaguing the US economy.
Key Quotes
“While market headlines are likely to focus on whether the Fed will or won’t hike in Dec, the real story is that ‘many participants’ are concerned that the weak inflation trends are more than just transitory – with structural and persistent factors weighing on US and global inflation. ING’s Rob Carnell is right by stating that as this is out of the Fed’s control, they could just embrace it by lowering the 2% inflation target – and it’s likely that most economic agents won't really care.”
“But from a market perspective, we're (arguably) already there when it comes to pricing in lower trend US inflation. It is true when the Sep Fed minutes note that market-based inflation expectations have remained stable recently. But equally, they have remained stable at a lower base relative to historic levels; the 5y5y US breakeven inflation rate remains around 70-75bps below its pre-2014 average, while even the Fed's latest Primary Dealers survey that participants on average are looking for US inflation to average around 1.78% over the next 10-years.”
“The lack of inflation premia suggests that bond yields are set to stay structurally lower for longer. More importantly, we need some sort of catalyst to change this thinking and with the fiscal stimulus story looking a lost cause for now, we’ll need evidence in the US data to determine whether trend inflation is higher. But as we saw after last week’s wage growth data, complicating the picture is the fact that the next couple of inflation data prints may well be distorted by hurricane-related effects. So while US PPI (today) and CPI (tomorrow) will be of some importance, we may not be able to accurately assess trend US inflation dynamics until 1H18. Strategically, this points to a fairly benign bond market environment – one that favours EM FX and carry plays against the USD. Goldilocks is here to stay!”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.