US: Inflation threatens to catch the market off-guard - AmpGFX

According to Greg Gibbs, Analyst at Amplifying Global FX Capital Pty Ltd, a conundrum in the marketplace is that the US labor market now appears tight and the Japanese labor market is perhaps even more critically tight, and labour markets in Canada, the Eurozone and the UK are also quite tight. 

Key Quotes

“Wage growth, while picking up, has not done so convincingly.”

“USA business surveys, the Fed Beige book and reports from the Fed minutes suggest that regional liaison is showing cost pressures and tight labor markets, and building evidence that companies are finding it easier to pass on higher prices.  Inflation has picked up in the USA and is now running near the Fed’s 2% target.  However, there appears little fear of an inflation breakout.”

“One might conclude that inflation risks are rising, especially with the recent tariff increases and threats of expanding these to $200bn of Chinese imports.  However, inflation and wage expectations remain contained.  Market-based measures of long-term inflation expectation have eased recently, and surveys have been stable.”

“Fed’s Powell glibly repeated a message he has delivered several times this year in his Jackson Hole Speech that, “While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating.” This was interpreted as dovish and appeared to help propel some further retreat in the USD on Friday.”

“While we have some sympathies with Powell's apparent lack of confidence in medium-term forecasts for potential growth, NAIRU and neutral rates, and can understand his ‘suck it and see’ approach to policy, we think it a bit disingenuous to say he sees no clear sign of inflation.”

“Current US rates market pricing might be too low if inflation does start to move above target. Consequently, we see upside risk for the USD on what is an increasing risk of accelerating US inflation.”