24 Mar 2015
Stability in US core inflation essential for a Fed hike – Capital Economics
FXStreet (Barcelona) - John Higgins of Capital Economics, comments that with Fed desiring a stable core inflation to begin its policy normalisation, today’s US CPI release will be keenly eyed, and further anticipates US 10-yr yields to end-2015 at 2.5%.
Key Quotes
“Today’s US CPI release has the potential to move markets given the FOMC’s desire to see some stabilisation in core inflation before beginning to normalise monetary policy. That being said, the behaviour of inflation expectations over the next few months is also likely to play a key role in determining when the Committee starts to raise its target for the federal funds rate.”
“After falling sharply in the second half of 2014, market-based measures of US inflation expectations (such as the spread between the yields of conventional Treasuries and TIPS with the same maturity) picked up during the early months of this year, but have begun to slip back. This pattern has mirrored the price of oil, which has started to decline again after rebounding earlier in 2015.”
“We do forecast a gradual rise in its price – our forecast is that the cost of Brent crude, for example, will end 2015 at $60 per barrel compared to $56 today, before creeping up to $65 by the end of next year.”
“Meanwhile, the ongoing recovery in the US labour market should eventually put much greater upward pressure on wage and core inflation than many seem to be anticipating. Indeed, we suspect that this development will not only bolster expectations for inflation itself, but also prompt FOMC participants to reassess how quickly they are likely to need to act.”
“If we are right, the US governments’ long-term borrowing costs are likely to increase – our end-2015 forecast for the 10-year Treasury yield remains 2.5%, compared to a current level of only around 1.9% today”
Key Quotes
“Today’s US CPI release has the potential to move markets given the FOMC’s desire to see some stabilisation in core inflation before beginning to normalise monetary policy. That being said, the behaviour of inflation expectations over the next few months is also likely to play a key role in determining when the Committee starts to raise its target for the federal funds rate.”
“After falling sharply in the second half of 2014, market-based measures of US inflation expectations (such as the spread between the yields of conventional Treasuries and TIPS with the same maturity) picked up during the early months of this year, but have begun to slip back. This pattern has mirrored the price of oil, which has started to decline again after rebounding earlier in 2015.”
“We do forecast a gradual rise in its price – our forecast is that the cost of Brent crude, for example, will end 2015 at $60 per barrel compared to $56 today, before creeping up to $65 by the end of next year.”
“Meanwhile, the ongoing recovery in the US labour market should eventually put much greater upward pressure on wage and core inflation than many seem to be anticipating. Indeed, we suspect that this development will not only bolster expectations for inflation itself, but also prompt FOMC participants to reassess how quickly they are likely to need to act.”
“If we are right, the US governments’ long-term borrowing costs are likely to increase – our end-2015 forecast for the 10-year Treasury yield remains 2.5%, compared to a current level of only around 1.9% today”