Fed Weighs Deflation Vs Jobs
If the Fed took two steps toward a rate hike last Friday with news of strong payrolls growth for October, then it took one step back today with evidence of deflationary pressures on cross-border prices.
By Peter Martin
Tuesday, November 10, 2015 - 00:00
The Bureau of Labor Statistics reported that US import prices fell 0.5% in October, which comes on top of a large downward-revision to September (originally reported as -0.1% but revised to -0.6%). This is just the latest in a succession of steep falls in import prices, following a 1.8% plunge in August and a 0.9% decline in July. Year-on-year, prices are down 10.5%, compared to 10.7% in September. The price falls were led by fuel imports, which declined 2.0%, though lower prices were not just restricted to this area: excluding fuel, import prices fell 0.3% after a 0.2% drop in September. Export prices also moved lower, though at a slightly slower pace than expected, falling 0.2% versus a consensus estimate for a 0.3% decline, while September was revised up to -0.6% from -0.7%.
There will be a concern that lower import prices will feed through and depress consumer inflation, though the Fed will be hoping that the tightening labor market will combat this and help nudge inflation back towards its 2% target. In this light, next week’s consumer price index could prove to be very significant. Although the labor market is strong, this has largely been the case all year and the biggest obstacle to a rate hike remains low inflation. Part of the problem lies in the strength of the US dollar and there are no signs of a reversal of this recent trend. EUR/USD fell 0.59% to 1.0693 on Tuesday and is near its lowest level since April. It is a similar story against other major currencies, with GBP/USD close to six-month lows and USD/CHF at its highest since March.
The stock market suffered a tough start to the week and the bumpy ride continued in early trading on Tuesday, with the main US stock indices all nosing down in early trading in New York. Shortly after the opening bell on Wall Street, the Dow Jones was off by 30 points or 0.17% at 17,700, the S&P 500 Index fell 0.14% to 2075.7 and the NASDAQ 100 dropped 0.60% to 4627.5. With the stream of economic news fairly light so far this week, the declines may just be a natural easing back after an extremely strong period of gains, though some of the pullback may also reflect concerns over the possibility of a rate hike.
Wholesale inventories for September are due to be released at 10.00 ET, with a rise of 0.1% expected, which would match the pace seen in August.
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