Consumer Price Inflation (CPI) figures, released this morning, surprised on the downside allowing policymakers to keep monetary policy extremely accommodating.
By Kevin Loane
Wednesday, September 17, 2014
The dovish figures provided some comfort to traders, who took the opportunity to enter after China announced fresh stimulus measures and with the Federal Reserve policy statement due later in the day. The S&P 500 jumped upon today’s open, rising 0.11% to 2001.13. The Dow Jones Industrials Average, meanwhile, increased by 0.18% to 17,162.42.
The Bureau of Labor Statistics (BLS) announced that consumer prices fell by 0.2% in August (Consensus: 0.0%), marking the first such decline in over a year. Over the past twelve months, consumer prices have increased by 1.7%. Core prices, which strip out noisy food and energy components, was flat on the month. They have risen by 1.7% over the past year, down from a 1.9% figure in July. The data suggest that the US economy has spare resources and can continue to be supported by extremely loose monetary policy for some time without prompting a rapid pickup in prices.
Chinese authorities responded to a slew of poor economic data in recent weeks by ramping up stimulus measures. Widespread media reports suggested that China’s central bank will pump 500 billion yuan ($81 billion) into the domestic banking system. The country’s five biggest lenders will receive 100 billion yuan each. Analysts suggest the move is broadly equivalent to a 50 basis point cut in interest rates. Policymakers have to weigh efforts to boost economic activity without encouraging lax borrowing, which is a risk that many commentators are already concerned about.
Currency traders appeared to sell the dollar on the back of weaker-than-expected inflation data, perhaps thinking it will lead to a more prolonged period of near-zero interest rates than was previously anticipated. The euro gained against the dollar, by 0.05%, rising to 1.2964 as some traders target the psychologically important 1.30 benchmark. The British pound, meanwhile, continued to perform well as polling suggest a No vote to be very likely in tomorrow’s referendum on Scottish independence. GBP/USD rose 0.4% to 1.6336 but remains down almost 3% over the past month. If the No camp does emerge victorious, further sterling gains might be anticipated.
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