Fx: The Numbers The Fed Watches
The Fed, in some minor modifications to its statement wording, took steps following the FOMC meeting this week (the penultimate meeting of the year), to keep the possibility open, at the least, for a rate hike at the December meeting.
By Peter Martin
Friday, October 30, 2015
By specifically referring in the statement text to the next meeting in its considerations of whether to raise its target range for the federal funds rate, the central bank has hoisted market expectations for tightening towards a shorter time frame, but the course of action is still bound by the same data-driven strictures as before and though there’s certainly enough time for the Fed to see the improvement it needs between now and December, the data for September is, if anything, counting the other way, at least where inflation is concerned and possibly in other areas of the economy.
The Fed’s preferred measure of inflation is the Personal Consumer Expenditure (PCE) price index, as reported by the Commerce Department. The PCE price index for September was released today and showed a 0.1% decline on the month, following a flat reading in August. On the year the change is just 0.2%, falling back from August’s 0.3%, and confirming that inflation remains a big obstacle in the way of a Fed move to tighten. Some of these price effects are related to softness in energy, though things don’t look that much better at the core level, which strips out food and energy prices. The core PCE price index climbed 0.1% in September, the same rate of change as measured in August, and the annual change in September was 1.3%.
Consumer spending — a key driver of growth in the US economy — was also tame in September, rising a lower-than-expected 0.1%, the lowest rise in eight months. A loss of momentum heading into October is a worry and we will probably need to see some solid holiday spending figures to reassure the Fed that the economy can withstand less accommodation.
The weakness in consumer spending, alongside the soft inflation data, has pushed the dollar lower today: EUR/USD rose 0.46% to 1.1037, GBP/USD was up 0.22% at 1.5347 and USD/JPY fell 0.42% to 1.2055.
It hasn’t all been bad news, though. The labor market has long been the bright spot in the economy and it was the bright spot amongst the data released on Friday morning, signalling tighter conditions. The employment cost index jumped 0.6% in the third quarter, following Q2’s lackluster 0.2% gain, and resuming the sharp upward trend established in 2014 and in the first quarter of 2015. Year-on-year the ECI was 2.0% higher in the third quarter, with increases in wages and salaries slightly outstripping those in benefits.
The euro received a boost from eurozone unemployment figures that came in better than expected. Unemployment in the European Union fell a chunky 131,000 in September, taking the unemployment rate down to 10.8%, while August was revised lower from an originally-reported 11.0% to 10.9%. Of the larger economies, Germany was unchanged, while France, Spain and Italy all saw improvements. The trend is starting to nose downwards to lower unemployment levels in the eurozone, which should have a beneficial effect on consumer confidence. Furthermore, eurozone inflation looks to have picked up pace this month, albeit from a deflationary starting point. The Harmonized Index of Consumer Prices (HICP) was 0.0% on the year in the provisional reading for October, up from -0.1% in September. This is still dreadfully below target for the ECB, of course, but should provide reassurance, nonetheless, that there was no lengthy sojourn in deflationary territory.
USD /CAD was little changed at 1.3163 following news that growth slowed in the Canadian economy in August. Canadian GDP rose 0.1% in August, in line with expectations, following expansion of 0.3% in the month prior. This was the lowest pace of growth since May, but was still enough to improve the annual growth rate to 0.9% from 0.8% in July. The Bank of Canada said last week in its October policy statement that ‘the risks around the inflation profile are roughly balanced’ and that it ‘judges that the current stance of monetary policy remains appropriate’. Today’s report will have done nothing to shake this position and policy consequently looks to be on hold for the time being.
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