Inflation dips, but for how long?

Following a rare week of gains for the greenback, the dollar was hurt on Friday as consumer price inflation fell below expectations. This was twinned with a fall in the equivalent producer-facing measure and both have pretty much put the nail in the coffin of a September rate rise. The same can’t necessarily be said for December’s meeting, but another run of weaker figures will make it difficult to justify tighter policy even a few months down the line.

CPI missed for the fifth consecutive month on Friday, which has led markets to put pressure on the dollar, sell any rallies and keep 2017’s greenback performance particularly dire. US exporters have been more than happy to deal at these levels and even hedge forward, particularly against the euro, which still sits close to two-and-a-half year highs against the US currency.

As we pointed out last week though, autos prices were the main culprit, as it appears vehicles coming off the forecourt were priced more cheaply to make the most of softening demand. CPI’s sensitivity to single factors like auto prices means inflation could snap back in a big way in the coming months. As such, inflation could take further focus over the next quarter or so.

Balance sheet reduction a hot topic on Wednesday

While we don’t expect rate hikes to have been a realistic prospect at the most recent Federal Reserve meeting, so-called quantitative tightening may have been. The Fed don’t just have rate hikes at their disposal, but also sales of the assets built up in the wake of the Global Financial Crisis (to the tune of $4.5 trillion) – which could be triggered as soon as September as a method to withdraw stimulus bit-by-bit.

Import price index could feel the sting of a weaker USD

This week is relatively data-heavy: retail sales and import/export price indices on Tuesday, housing starts and building permits on Wednesday, Philly Fed manufacturing on Thursday followed by the University of Michigan sentiment numbers on Friday.

All the above could prompt two-way volatility in the dollar, we believe the often overlooked import/export price numbers could prove the most interesting. While the dollar’s fallen close to 10% year-to-date, import and export prices have remained relatively rigid. This will likely be due to the long-term hedging arrangements available to larger corporates that contribute most heavily to the numbers – but the same won’t be the case for small- and medium-sized companies who are dealing with this daily across the country. We anticipate that the dollar’s fall will begin to really kick in toward the end of 2017, with export prices dropping and import prices rising fast.