Seasonally adjusted, the Core index increased 0.3% MoM in August, beating expectations of a 0.1% increase. This is also up from the 0.1% seen in July.
Today’s number hauls the yearly Core CPI up to 1.7%, better than the 1.6% expected and the 1.5% seen over the last four 12 month periods.
The headline Consumer Price Index, or raw number, came in slightly worse than expected on a MoM basis. A figure of -0.2% was reported in comparison to -0.1% expected. Overall, this brings the YoY number to 3.5%, up from 3.4% in July.
The Bank of Canada’s Core CPI excludes fruit, fruit preparations and nuts, vegetables and vegetable preparations, mortgage interest costs, natural gas, fuel oil and other fuels, gasoline, inner-city transportation and tobacco products and smokers’ supplies. This would account for the difference between headline and Core CPI.
Among the components weighing on the all-items CPI were transportation down 2.1% MoM and energy which registered -3.0% MoM. However, on a yearly basis transportation and energy are still up 5.8% and 20.2% respectively.
The Canadian Dollar’s reaction to the data was fairly tame, managing an intra-day low of 1.0303 in the USDCAD. However, traders are still very much preoccupied by the US Fed Wall Street bailout.
Core CPI increased 0.2% MoM seasonally adjusted, the Bureau of Labor Statistics reported today. This brings the un-adjusted 12-month number to 2.5%.
Core CPI is regarded by the Fed as the key indicator when setting the Federal Funds Rate, which is also set to be reported today. The 3-month annualized average has Core inflation at 3.4% which is above the Fed’s comfort zone. Although the recent crisis in the credit markets will probably prevent the Fed from increasing rates.
The headline CPI provided a slight shock today when it came in at -0.1% MoM. This represents the first decline in consumer inflation since October 2006 and brings the un-adjusted annual rate to 5.4%, below expectations of 5.5%.
This drop was due in part to the 3.1% fall in energy prices in August. However, energy is still up 27.2% over the last year. Transportation costs also weighed on the Index, down 1.5% MoM.
The increase in food costs continues; up 0.6% in August, 6.1% over the last 12 months.
Market reaction in the US Dollar is hard to judge due to other high volatility data, credit concerns and the forthcoming FOMC Interest Rate Statement. However, the US Dollar is trading slightly higher against the Euro and UK Pound on an intra-day basis.
Last Week
The most interesting price action last week came on Friday with the US Dollar giving back some of its recent gains. The Dollar sell-off was triggered by weaker than expected PPI and Retail Sales news and speculation that the Fed may have to cut interest rates further in order to stimulate the economy.
However, it is unlikely that the Greenback has formed anything more than a short-term top on healthy profit taking activity. The Fed may very well have to cut interest rates further; interest rate futures are currently pricing in a 40% chance of a cut by December, up from 0% a month ago. But the medium term outlook remains the same.
There is still no change in the view that other country’s economies (Eurozone and UK in particular) are slowing faster than in the US. This will lead to interest rate cuts from the respective central banks. Due to the fact that their rates are currently much higher than the Fed’s the Dollar will be supported by the theory that ECB and BOE interest rate cuts will be much more aggressive than any more from the Fed.
This Week
We begin the week on Monday with traders keen to see how Friday’s profit taking has been digested over the weekend. With no high volatility events planned it could be a quiet session, especially with the Japanese national holiday ‘Respect for the Aged Day’.
Monday’s highlights are likely to be the Swiss double header at 08:15 with PPI MoM and Retail Sales YoY due for release. The Producer Price Index is likely to come in at -0.2% after last month’s 0.5% increase. Retail Sales are expected to show a sharp increase with expectations at 2.3% compared to the yearly figure released last month of 0.7%.
Later in the day we are also likely to see some volatility from the US with the Empire State Manufacturing Survey, Capacity Utilization Rate and Industrial Production set for release. All three indicators are likely to show evidence of a waning US economy. The Manufacturing Survey will probably come in at 1.5 vs 2.8 last month, Capacity Utilization will fall to 79.6% from 79.9% and Industrial Production probably contracted by 0.3% last month.
In the early hours of Tuesday morning we will have our first high volatility event of the week. The RBA Monetary Policy Meeting Minutes will be released with traders keen to see how September 2nd’s meeting unfolded. The decision was taken at the time to leave the cash rate unchanged at 7.00%.
Tuesday will play host to four very big announcements with no less than 3 CPI numbers and the FOMC Interest Rate Statement all due. First up is UK CPI with consumer inflation expected to smash the BOE’s 2.0% target once again. Economists are predicting year-over-year inflation at 4.6%, up from the 4.4% in July.
Half an hour later, at 10:00 UK time, the Eurozone CPI will be released. The Consumer Price Index is expected to remain at 3.8% YoY. It should also be noted that the Eurozone ZEW Economic Sentiment is due for release at the same time. It is unlikely that this data will conflict significantly with the CPI but traders should be alert non the less. ZEW Sentiment is expected at -55.0 vs -55.7 last month.
The next high volatility event will be the US Core CPI MoM. The data came in at 0.3% last month with 0.2% expected this time.
At 19:15 the FOMC Interest Rate Statement is due. The Federal Funds Rate is expected to remain at 2.00% with traders watching the language in the accompanying statement very closely. The focus will be on any change in the language that may allude to a rate cut before the end of the year.
Wednesday will see the release of the BOJ Interest Rate Announcement. Although it is not considered a high volatility event in itself with the Overnight Call Rate expected to remain at 0.50%, the BOJ Press Conference due before 08:00 will draw high volatility.
The next round of high volatility on Wednesday is due from the UK. The BOE MPC Meeting Minutes and Claimant Count Change will hit the wire at 09:30. Claimant Count Change is expected to increase slightly with 22.2K expected vs 20.1K reported previously. The MPC Meeting Minutes are likely to show a 1-1-7 vote split in favour of keeping rates unchanged at 5.00%.
Next up for the US is the release of Building Permits. Economists are expecting a figure of 925K residential permits issued compared to 937K last month.
On Thursday the first high volatility event will come from the UK at 09:30. Retail Sales MoM are due with a figure of -0.4% expected compared to a 0.8% increase last month. UK Retail Sales have been exceptionally volatile of late with numbers ranging from 3.6% to -4.3% over the previous 3 months. It would be very wise for traders to exercise caution around the time of this event; especially those focussed on short-term price swings.
At 13:00 the third central bank announcement is due. This time it comes in the shape of the SNB Interest Rate Statement. The Statement is comprised of the LIBOR Rate and the Monetary Policy Assessment. The general consensus is that the SNB will remain on hold at 2.75%.
The final high volatility event of the week will come at 23:45 on Thursday night from New Zealand. The Current Account balance is expected to have fallen further into negative territory to $ -3.4B from $ -2.2B last month.
Friday promises to be a quiet day, especially in the New York session. Early volatility will be seen when BOC Deputy Governor Murray speaks in Toronto and later on for the German PPI number. However, both of these events are only classified with a medium volatility rating.
