August 20, 2015

Markets Today: Inflation not employment

Inflation is back in vogue, and (in the US) it is being kept lower by a stronger USD and lower commodity prices.

Inflation is back in vogue, and (in the US) it is being kept lower by a stronger USD and lower commodity prices. That provided a theme from the FOMC minutes and has reversed some of yesterday’s market moves, as we all watched the Chinese yo-yo’ing equity market.

We start the day with European equities much lower, but the US having stemmed some gains before the close. Yields are generally lower, and gold prices are up. The USD fell sharply after the minutes, with the EUR outperforming.

Oil prices are down to lows not seen since 2009 for WTI, coming on the back of an official report showing an increasing glut of supply. This is likely to further weigh on commodity prices related to energy and growth, and their related currencies.

But it also gets interesting, in that the Fed spent a long time discussing inflation, in which they are not totally convinced that it shall meet their 2% target at the going rate. And that is partly due to declining energy prices, and partly due to the stronger USD. The minutes were not all dovish, given that “most” members felt that the time to begin normalising policy is “approaching.” But there were perhaps more concerns about inflation than market participants had expected. The concerns about the labour market were mostly gone, so we turn to inflation.

This concern was added to in light of the earlier release of the CPI data, adding to confirmation bias. That data showed that headline inflation was a little under expectations (0.1%mA, 0.2E, 0.3P) due to a drop in energy prices but also a one-off drop in airline fares. This one-off had a bigger influence in the core inflation missing expectations by the same amount as the headline. Shelter, or housing, which is a bigger proportion of inflation than energy rose. But with the Fed shifting its gaze a little, today’s miss played into the general sentiment and pushed out pricing for the FOMC hike mostly beyond September.

So while the FOMC minutes suggest that the effects of a stronger USD and lower energy prices will abate, there are cautions, and we are likely left obsessively monitoring all and every price indicator released.

They also showed some concerns about the weakening growth indicated by the events in China (Greece was deemed dealt with). These are still playing out. Yesterday we saw further sharp declines in the equity market, but a liquidity policy from the PBoC called the MLF (medium term lending facility) which provides funding to banks to ease intrabank liquidity concerns provided around CNY110bn to 14 banks. This was to counter the rise in short term yields which continued yesterday, despite Tuesday’s injection of funds via 7 day repos. There is much written about the likelihood of a RRR cut soon and markets will be monitoring for other easing measures to allay concerns.

In Europe, Germany ratified its bailout funds to Greece, not without objections, but the funds will be paid. Nothing to see there on the policy front.

From a local point of view, what caught my eye yesterday was the news that an iron ore exploration company has decided that it is more profitable to sell eggs to China, from Australia, than to continue with its ore exploration plans. This adds to the theme of miners using land to produce agricultural products to export, as well or instead of producing ore. Given the drop in price of iron ore, it makes sense. But, we have looked at this agriculture versus minerals debate before. Increasing agricultural exports is good for the economy and they will contribute, but they won’t take the place of energy and mineral exports. The ramp up in volumes in iron ore and LNG volumes mean that there are just not enough eggs to compete. It does, however, highlight that there are options for smaller players.

Coming Up

Another quiet day is likely, as market have no new news locally and we are left monitoring China for guidance.

Fed’s Williams is speaking late afternoon, and as a neutral voter has the potential to sway the market back to hiking if there is any hint of a willingness to start the normalisation policy; given the minutes last night.

UK retail sales are expected to pick up and add to the GBP support of recent days. A surprise would be weakness after the June numbers.

US Philly Fed will hopefully expel the concerns arising from the shocking decline in the Empire Survey. The survey is broader and is expected to improve modestly.  Existing home sales are volatile and should have lesser interest to markets.


On global stock markets, the S&P 500 was -0.60%. Bond markets saw US 10-years -7.22bp to 2.12%. On commodity markets, Brent crude oil -3.85% to $46.93, gold+1.5% to $1,134, iron ore -0.9% to $56.41. AUD is at 0.7354 and the range was 0.7312 to 0.7375.

  • US CPI 0.1%A, 0.2E, 0.3P yoy 0.2%YA, E, 0.1P
  • US core CPI 0.1%mA, 0.2E, P, 1.8%yA, E, P

For full analysis, download report:

For further FX, Interest rate and Commodities information visit