Earlier in the week, Fed chair Janet Yellen emphasised the significance of inflation and wage growth to the timing of rates lift-off. As a result, the CPI data released yesterday was always going to carry significant weight.
While the headline inflation reading fell 0.7% and was a touch below expectations, the core CPI reading was up 0.2% and slightly ahead of estimates. This implied a 1.6% rise year-on-year, which is still a bit below the Fed’s 2% target.
Perhaps the drop in headline inflation is not as worrying given some of the moves we’ve seen in energy prices. On the wage growth front, as long as the US economy continues to generate as many jobs as it has been in previous months, a fall in unemployment is likely to eventually lead to wage growth. There was also some hawkish rhetoric from Fed members with Bullard and Mester expressing their desire for a mid-year lift-off.
Mr Bullard was perhaps the most aggressive after saying confidence on inflation will be lifted by January core CPI, once again calling on the Fed to remove the patient phrase at the March meeting. This saw currency divergence ramp up with the USD gaining significant ground against the majors. There were some big moves in EUR/USD, AUD/USD, USD/CAD and cable. These pairs are likely to continue presenting some excellent trading opportunities in the near term.
Growth target key for China
China remains a significant focal point after rallying yesterday on some stimulus speculation. While the country continues to take targeted measures to ease liquidity concerns and distress certain areas, it’ll be hard to get a clear picture of what officials are looking to achieve this year without knowing the growth target.
Premier Li Keqiang will announce the growth target at the annual parliament session in March and this will give a clearer picture of what to expect from officials this year. China is expected to announce a growth target of around 7% and the more aggressive the target is, the more likely we are to get stimulus.
If the target is not aggressive, then there is a good chance officials will be focusing on pursuing reforms this year. This week we saw China’s HSBC manufacturing PMI bounce back but some felt this could have been a bit seasonal.
On Sunday we receive China’s official manufacturing and non-manufacturing PMI numbers. There is a good chance we could see seasonality at play in these numbers as well due to the Chinese New Year. The ASX 200 has also managed to edge higher, with investors focusing on next week’s RBA meeting and good momentum for China and Japan.
Weaker open for Europe
Ahead of the European open, we are calling the major bourses lower with some of the gains from yesterday’s trade being given back. Stimulus seems to be working a treat for some of the key markets around the world, including Japan and the Eurozone. Recent data out of Europe has also been showing some positive signs and this has really encouraged investors to drive equities higher.
Upside surprises in data included German unemployment, German consumer climate, M3, money supply and private loans data. Later today we have German preliminary CPI, French consumer spending and Spanish CPI. The DAX has been a standout and it is also benefiting from renewed weakness in the euro.
It’s been a month of breaking records for the DAX and, whilst it doesn’t seem like it’ll open at a fresh record today, I wouldn’t be surprised to see it bought off any pullbacks and drift higher through the session. The combination of stronger data, QE and a weaker euro seems to be working very well for the DAX.