Inflation Data Eyed as Fed Policy Makers Question December Rate Hike

• US inflation data could hold the key to December Fed rate hike;

• Oil surges as China reports second highest crude imports.

It’s been a relatively calm week for financial markets and yet, with indices continuing to trade at record highs there is plenty of reason for optimism.

With the global economic outlook improving all the time, central banks have a new and equally difficult challenge on their hands, unwinding years of unconventional monetary stimulus and adapting to what has become known as the new norm. The Federal Reserve has been very much ahead of the curve on this and continues to lead the way, with interest rates having risen four times over the last two years and at least a few more pencilled in over the coming year or so.

Just as the Fed first went into quantitative easing blind, the return to normalisation has been far from conventional or straightforward and it seems policy makers are nearing an impasse, with a growing number becoming increasingly uncomfortable with raising interest rates. The problem with raising interest rates on the expectation that inflation will rise towards target due to an apparent tightness in the labour market, is that when the results take longer to materialise than first thought, policy makers will naturally doubt the models being used and whether more damage than good is being done.

With that clearly evident from the recent FOMC minutes and numerous Fed speakers we’ve heard from in recent weeks, today’s inflation data is going to be monitored very closely for signs of price growth. The CPI reading is forecast to jump quite a bit this month, from 1.9% to 2.3%, but this is expected to reflect short-term effects, such as higher fuel prices. The core reading is also expected to rise, but a much more modest 0.1%, from 1.7% to 1.8%. While these may appear much nearer target than has been made out, it’s worth noting that the CPI number is not the Fed’s preferred measure of inflation but it is released a couple of weeks before the core PCE price index and therefore is followed closely for signs of price pressures building or declining.

Retail sales data will be released alongside the CPI numbers today which could make things quite volatile ahead of the open. Consumer spending is a crucial component of the US economy and something that has underwhelmed throughout the recovery and has been on a downward trajectory this year. A big spike is expected this month but once again this is likely to be a temporary bounce.

Higher oil prices are helping to drive gains in equity markets on Friday, with Brent and WTI crude both up around 2% on the day. While Donald Trump’s speech later on Iran and the possibility of renewed sanctions may be supporting prices, the move is likely more down to the trade data from China and the inventory numbers on Thursday, both of which are bullish for oil. A larger than expected drawdown reported by EIA, after API reported a more than three million barrel build on Wednesday, pointed to further rebalancing in the oil markets.

This was followed overnight by China reporting the second highest ever monthly crude imports in September. Higher than expected demand and rising forecasts for demand growth next year are helping to reduce the global oversupply and aid producers in their bid to return stocks to their five year average.