Tags: inflation | fed | rate | cut | prices | economy

Roaring Inflation Will Kill Rate-Cut Chances

Roaring Inflation Will Kill Rate-Cut Chances
(Dollar Photo Club)

By    |   Thursday, 11 April 2019 10:31 AM

The producer price index rose 0.6 percent in March after having edged up 0.1 percent in February and decreased 0.1 percent in January.

The core index, which excludes food and energy, went up 0.3 percent from the previous month, after a 0.1 percent gain in February and also beating consensus of 0.2 percent. On a yearly basis, producer prices rose 2.2 percent, the largest increase since December, and the core index advanced 2.4 percent.

These producer price inflation (PPI) numbers will be looked at by investors at a time when wage costs are rising and the U.S. profit share of GDP is starting to fall, the degree of pricing power, which is reflected in the PPI, does matter rather.

No, the Fed won’t cut rates as inflation is coming!

The dollar index trades at about 97.1190, significantly up from yesterday’s close at 96.9460 while remaining in its bullish trend.

There was also some good news yesterday from Treasury Secretary Steven Mnuchin saying that the United States and China had largely agreed on a mechanism to policy any trade agreement they reach, including “enforcement offices," Reuters reported.

Treasury Secretary Steven Mnuchin also added that there were still important issues for the countries to address.

Meanwhile, global central banks have the rather tricky task of running the economy.

The European Central Bank (ECB) press conference yesterday was suitably dovish in tone because it was conducted by ECB President Mario Draghi who never resists an opportunity to sound dovish. But the overall view of the economy was that Europe’s economy is performing as “expected”. Remember that the ECB would like to “raise rates” at the end of this year if the European economy performs as “expected”.

It’s also worth noting the positive surprises and positive revisions to various European industrial production data released yesterday.

The euro was quoted at about $1.1260, slightly down from yesterday’s close at $1.1274.

Meanwhile, the minutes of the Federal Open Market Committee make it clear that “patience” does not mean that the next interest rate move will be a “cut”.

The minutes read: “Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year; several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook. Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.”

One worry for the Fed of course is that President Donald Trump just sent a clear message to the economic policymakers gathering in Washington for the International Monetary Fund and World Bank's spring meetings: “My trade wars aren't finished yet and a weakening global economy will just have to deal with it,” the Straits Times (Singapore) reported.

Increasing tariffs on trade end up hurting either U.S. companies or U.S. consumers while uncertainty of trade tariffs seems to be hurting the U.S. economy by delaying investment.

Finally, last night, in and around the Europa Building in Brussels where 28 heads of state of the EU met to decide on another delay of Brexit there was a sound familiar to anyone who has spent anytime contemplating the European Union. The sound was the sound of a can being kicked down the road.

The final decision was that the United Kingdom (UK) will be cut off from the European Union (EU) on Thursday, October 31, which coincides with the date of this year’s Halloween. Anyway it is seven months after the originally planned exit date, which was March 31, unless, of course, the can is kicked down the road again.

Is this a trick or a threat? It’s probably neither. There were lots of conditions to make sure that the UK doesn’t scare the EU by “misbehaving.” There is also the possibility of an earlier exit, but nothing really has changed, the BBC reported.

Markets can continue to ignore all the noise surrounding Brexit and focus on the likelihood that the eventual outcome will be a relatively close relationship between the UK and the EU.

The UK consumer continues to function without any regard for all this. UK industrial production was stronger than expected yesterday and past data was revised stronger as well.

The focus may now start to shift towards the timing of a potential UK general election.

The British pound quotes at about $1.3079 which is lightly lower than at yesterday’s close.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The Fed won’t cut rates as inflation is coming!
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Thursday, 11 April 2019 10:31 AM
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