What does US inflation data mean for the FOMC?
Will the Fed consider an ECI reading of 1.2% “uncomfortably higher” at the FOMC next week? In addition, the Fed’s preferred measure of inflation has returned to levels not seen since March.
Ahead of the data release on Friday morning, Fed whisper Nick Timiraos of the Wall Street Journal tweeted that “although the Fed is not reliant on data points and next week’s 75bp decision looks unlikely to change, another reading. of the unpleasantly high ECI could justify a slightly higher terminal rate and could cloud the debate on the slowdown in the pace in December ”.
Inflation data released this morning came close to expectations. The US Core PCE price index, the Fed’s preferred measure of inflation, was 5.1% y / y versus an expectation of 5.2% y / y and a previous reading of 4.9% y / y . Although the spread was slightly lower than expected, it was higher in August and the highest level since March. The labor cost index for the third quarter was 1.2% quarterly versus an expectation of 1.2% quarterly and a previous reading of 1.3% quarterly.
Based on Timiraos’ tweet and Friday’s inflation data, it seems almost certain that a 75bp hike next week is on the cards. However, what does today’s data mean for the December meeting. Recall that just a few days ago Timiraos wrote an article suggesting that at the next meeting the Fed would discuss whether to reduce the pace of rate hikes to 50 basis points from 75 basis points. Although Core PCE and ECI are more or less in line, today’s tweet mentions “another uncomfortably high ECI reading”. Will the Fed consider a 1.2% reading an uncomfortably high reading? In addition, the Core PCE is at its highest level since March (when the Fed started raising rates). As this is the Fed’s preferred measure of inflation, it seems possible that the Fed may stick to its rate hike pace of 75 basis points at its December meeting.
With the FOMC appearing to be committing to a 75 basis point hike at the November meeting, the likelihood of a 75 basis point rate hike in December jumped to 40%, according to CME FedWatch. Tool. However, a 50% rating still favors a 50 basis point hike.
On the 4-hour chart, the price of the pair USD / JPY it is the most sensitive to changes in interest rate expectations. The pair was bidding for most of the day, mainly due to the BoJ’s dovish meeting earlier. However, if the market thinks a 75 basis point rate hike is in the cards for November and December, USD / JPY could rise. On the 4-hour chart, the pair is hovering near the horizontal resistance at 147.51. If the pair is bullish, the next resistance is on the lower trend line of a rising channel near 148.75. Above, the price could move towards psychological resistance at the round number 150.00 and then to the highs of October 21 at 151.95. However, if the pair becomes lower, first support will only exist at the confluence of support from the highs of September 22 and the lows of October 27 between 145.10 and 145.90. Below that, the price could fall to the 61.8% Fibonacci retracement level from the lows on September 22 to the highs on October 21 at 144.78 and then to the lows on October 4 at 143.49.
USD / JPY 4-hour chart
Will the Fed consider an ECI reading of 1.2% “uncomfortably higher”? Furthermore, the Fed’s preferred measure of inflation has returned to levels not seen since March. This should get the Fed’s attention. As 75bps appears to be a closed deal for the November meeting, the markets are now looking to the December meeting. Will the Fed pivot and reduce the pace of the hike at this meeting? Or will the economic data at that point lead the markets to believe that the terminal fee will be higher?
By Fawad Razaqzada, FOREX.com ” Official site
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