Date: October 11, 2018
U.S. Core Inflation Trails Estimates as Used-Car Prices Tumble
A gauge of underlying U.S. inflation was below estimates in September as used-vehicle costs fell and housing rents cooled, signaling that price gains may remain close to where Federal Reserve policy makers want them amid an outlook for continued gradual interest-rate hikes. Excluding volatile food and energy costs, the core consumer price index rose 2.2 percent in September from a year earlier, the same pace as in August and less than the 2.3 percent median estimate of economists surveyed by Bloomberg News, a Labor Department report showed Thursday. The broader CPI slowed to a 2.3 percent annual gain, the least since February, compared with forecasts for 2.4 percent. The moderation in core inflation partly reflects a 3 percent monthly decline in prices for used cars and trucks, the biggest drop in 15 years. Fed officials will have two more months of price figures in hand before their December meeting at which they’re projected to raise interest rates for a fourth time this year amid solid economic growth and consumer spending, boosted by tax cuts. Benchmark Treasury yields have climbed to multi-year highs this month amid investor expectations that the Fed will continue raising rates to the point of eventually restricting growth, and Wednesday’s rout in stocks has put added focus on economic data. A market-based gauge of the annual U.S. inflation rate for the next decade — the 10-year breakeven rate — remains near a four-month high of 2.17 percent reached last week. The core CPI rose 0.1 percent in September from the prior month, compared with the median estimate of economists for a 0.2 percent gain. The broader index was also up 0.1 percent, below forecasts for a 0.2 percent increase. The slowdown in inflation helped push price-adjusted wages higher in September. Inflation-adjusted pay rose 0.5 percent from a year earlier, following a 0.2 percent increase in August.
U.S. Futures Erase Drop; Dollar Falls on CPI Data: Markets Wrap
There was some respite on the horizon for equity investors on Thursday after the biggest U.S. stock selloff in months rolled through Asia and Europe. U.S. futures erased a drop, Treasuries slipped and the dollar extended a decline as American consumer price data missed estimates. Contracts for the S&P 500 traded little changed after earlier extending losses from Wednesday. Treasuries, which helped trigger the stock selloff when 10-year yields hit the highest since 2011, mostly fluctuated in a narrow range after jumping on Wednesday. The worst of the global stock declines were in Asia, where China’s Shanghai Composite gauge closed down more than 5 percent. Taiwan’s technology-heavy TWSE Index plummeted more than 6 percent in the region’s worst performance. By comparison, European losses were more contained, with the Stoxx Europe 600 Index and Britain’s FTSE 100 both slipping no more than 2 percent. Italian equities headed for a bear market, however, and LeasePlan Group NV pulled a planned IPO. Investors seeking to pinpoint the cause of the current rout in equities have no shortage of culprits: U.S companies are increasingly fretting the impact of the burgeoning trade war, while the same issue prompted the IMF to dial down global growth expectations. In the tech sector, which was a key driver of the rally that pushed American equities to a record just a month ago, expensive-looking companies have been roiled by a hacking scandal. Against this backdrop, the Federal Reserve has been trimming its balance sheet and raising interest rates, provoking the ire of an unpredictable President Donald Trump and helping force a repricing of riskier assets. Trump, who has claimed credit for record U.S. stock levels, said after the market closed on Wednesday that the Fed is making a “mistake” and “has gone crazy.” Trump also said the stocks decline was “a correction that we’ve been waiting for for a long time,” after being briefed on the market turmoil. Treasury Secretary Steve Mnuchin said he’s not surprised the market is having “somewhat of a correction.” “What you’re seeing right now is a bit of a panic — we wouldn’t say this looks like the end of the cycle,” said William Hobbs, head of investment strategy at Barclays Investment Solutions in London. “You’ve got to try to keep the skin in the game for as long as possible because it’s an incredibly profitable period of the cycle to be invested through if you can keep your nerve.”
ECB Holds Off Pushing the Alarm Button Over Global Risks
European Central Bank policy makers held back from raising the alarm about risks to the euro-area outlook even after a debate that noted mounting global threats. At its last policy meeting, the Governing Council focused on the impact of trade protectionism and even said that there was a case for characterizing the risks as “tilted to the downside given the clear prevalence of downward global risks.” It ultimately decided that the strength of the domestic economy meant it could stick to “broadly balanced.” The debate during the Sept. 12-13 meeting highlights the difficult navigation for the ECB as it starts to wind down its stimulus while also keeping an eye on global trade disputes, emerging market turmoil and Italy’s budget-related bond ructions. President Mario Draghi has since said the euro-area economy is strong enough to cope with global tensions. But the publication of the accounts comes amid a global equity selloff that Goldman Sachs says is due to mounting worries about the global outlook. Just this week, the IMF said world economic expansion is plateauing as it trimmed its growth projections for the first time in more than two years. In September, the ECB lowered its own forecasts, and a remark was made in the meeting that some of the factors behind the revisions “might not be entirely of a transitory nature.” At the same time, officials said the recent moderation reflected convergence toward the economy’s potential. “Caution was seen as warranted since heightened uncertainty in the global environment might yet impact the euro area more significantly over time,” the ECB account said. Policy makers also referenced the euro’s advance of more than 10 percent since the beginning of 2017, though noted that recent moves largely reflected developments in the Turkish lira. Policy makers expressed satisfaction with investors’ reaction to their June decision to gradually phase out asset purchases until the end of the year. And they said their current stance shouldn’t be changed because of “small changes in the outlook.” The account suggests that Governing Council members disagreed over whether to keep some flexibility to increase stimulus again as needed. “It was widely considered prudent” to stick to a previous pledge to “adjust all instruments as appropriate,” according to the report.
U.S. and China Jockey for Global Support as Trade War Ramps Up
The U.S. and China are set to use the latest gathering of the world’s finance chiefs to marshal support for their respective cases in a trade dispute that shows no sign of ending soon. Finance ministers and central bankers from the International Monetary Fund’s 189 member nations are gathering in Bali, Indonesia this week for the fund’s annual meeting. While the agenda will include discussions on the broader health of the global economy, it will also be an opportunity for American and Chinese officials to cobble together alliances. On one side is President Donald Trump, who argues his tariffs are a necessary price to pay to force China to stop what he calls unfair trading practices and theft of intellectual property. On the other is President Xi Jinping, who has positioned China as a champion of globalization and the existing trading order. In a series of speeches, Xi and his top officials have warned about the danger of tearing apart that system, while promising to gradually open up the Chinese economy. “The struggle for trade alliances carved out of political allegiances is well and truly on,” said George Magnus, an economist at Oxford University’s China Centre. “This is no ordinary trade spat, such as the one we saw with Japan in the 1980s. This is existential.” China will resist U.S. pressure just as it overcame “bullying” by other foreign powers in the past, Chinese Commerce Minister Zhong Shan told Bloomberg this week. That comparison with the invasions of China during what is often termed the “Century of Humiliation” suggests that the government isn’t likely to back down easily. The U.S. last month slapped tariffs on a further $200 billion in Chinese goods, prompting Beijing to retaliate on $60 billion in American products. Trump and Xi may talk at a meeting of the Group of 20 nations at the end of November, White House economic adviser Larry Kudlow said last week. “Better to talk than not talk, but the talks have to be serious,” said Kudlow, adding that Trump “believes that whole trading relationship is broken.” U.S. Treasury Secretary Steven Mnuchin on Thursday met with People’s Bank of China Governor Yi Gang on the sidelines of the IMF meetings in Bali. “We discussed important economic issues,” Mnuchin wrote on Twitter, without elaborating. However, in an interview with Bloomberg News, Mnuchin said he’s worried about the recent decline in the value of the yuan.