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Week ahead: US core PCE and eurozone CPI

23 Sep 2022 04:58 PM

We heard from a range of central banks last week and the update sparked big moves in the markets, and the bulk of the volatility was in currencies. The Federal Reserve hiked interest rates by 75-basis points, meeting expectations but the forecast was more hawkish than expected and in tun the US dollar index jumped to a fresh 20-year high, and the Dow Jones dropped to a two-month low. The bullish run on the US dollar did not last long as the Bank of Japan bought yen was a way of supporting the currency, it was the first time the BoJ had intervened in the market since 1998. Lately, the yen has been under major pressure, and it is possible the BoJ wanted to send a message to speculators that they might act again. Unsurprisingly, the yen enjoyed a major rally as short covering fuelled the rise. Major losses were seen on the Swiss franc even though the Swiss National Bank increased rates from -0.25% to 0.5%, going into the meeting there was speculation about a potential 100-basis points rise so the move disappointed in that regards. The Bank of England meet forecasts by lifting rates by 0.5% but only five of the nine policymakers backed the move so that speaks to division.

Inflation is a hot topic these days as it has triggered a wave of interest rate hikes, and there is speculation that more monetary tightening is in the pipeline. On Friday, the US core PCE reading will be announced, the report is the Fed’s preferred measure of inflation. The latest reading was 4.6%, it lowest in nine months. The January reading was 5.3%, so that speaks to a large drop. Another measure of inflation is CPI, earlier this month US CPI cooled to 8.3% from 8.5% but economists were anticipating it to fall to 8.1%. Even though the headline CPI dipped, the core metric ticked up to 6.3% from 5.9%, and that implies that underlying demand is rising. The Fed are determined to bring down inflation and there is some evidence the demand is fading. Since March, the Fed has lifted rates by 200-basis points. Lifting rates can up the brakes on the economic activity but it can take months for hikes to trickle down through the economy. The core PCE reading could give us a clue as to the Fed’s next move. The final reading of US GDP for the second quarter will be posted on Friday. According to the advance reading, the economy contracted by 0.6%. The US economy is in a technical recession and the GDP report could be the final confirmation of that, unless it is given a big revision that puts it into positive territory.

Last month, the European Central Bank hiked interest rates by 0.75% as the bank wants to try and keep a lid on rising inflation. CPI in the eurozone is at a record high. On Thursday, Spanish and German CPI will be revealed, and previous reports were 10.5% and 8.8% respectively. The flash CPI reading for the eurozone will be posted on Friday. The is 9.1%, which is a record high and that is a major reason as to why the ECB lifted rates by 1.25% in the past four months. Even though the ECB has begun tightening its policy, it also announced the transmission protection instrument during the summer, which is essentially a mechanism that will prevent government bond yields of from rising too quickly. Last week, the German five year-yield hit its highest mark in 11 years, and that is a sign that bond traders expect more rate hikes from the ECB. The TPI was set up to protect heavily indebted countries like Italy from having a debt crisis, so therefore the ECB cannot be overly aggressive when it comes to tightening policy. The latest UK and US CPI reports have showed slowing growth, so traders will be wondering will it be a similar situation for eurozone CPI.

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