Release: Core CPI m/m Consensus Forecast: 0.2% Previous: 0.1%
Date/Time: 02/17/12 08:30 AM ET (13:30 GMT)
With Macro Indicators Pointing Towards Growth, Weaker Inflation Would be Key to More QE
US economic data continued to post positive surprises again this week, with jobless claims falling to a four-year low and housing starts continuing to increase. That helps to solidify the US growth momentum story that has been a major market theme over the last 2-3 months. Tomorrow, with the US posting its latest consumer price data, the attention will turn to inflation.
This release carries importance because of the speculation around quantitative easing, and as markets digested the insight into the Fed's thinking from the latest FOMC minutes.
From FT: Only a few members of the rate-setting Federal Open Market Committee thought that economic conditions could warrant the initiation of additional securities purchases before long
Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 per cent over the medium-term, the minutes continued.
Therefore QE3 is on the table, but it would take the economy deteriorating or if inflation looks like it's heading south and will undershoot the 2% inflation target.
Certainly on the economic front a healing labor market, improved housing, and stronger manufacturing - at least according to the leading indicators from the Philly Fed and New York Empire Fed indexes - shows that the economy continues to be on the mend, though caution remains as to the fallout from the uncertainty in the European-Greek theater.
Therefore for the FOMC, incoming inflation data will carry weight as to the second part of of that argument for or against more easing - prices.
Expectations for January's Consumer Prices - Uptick in Monthly Rates
The monthly readings on consumer inflation are expected to pick up in January, with a 0.3% monthly increase in the headline reading and a 0.2% increase in core CPI. That would be improvement from flat prices in December and a 0.1% gain in core prices.
In annual terms, headline inflation continues to ease following the peak in the middle of last year while core CPI continues an upward path. The Fed targets 2% in core inflation via the core PCE index. Looking at core prices via the CPI we see prices have been above the 2% level for the past 3 months.
The headline annual rate is expected to decrease further to 2.8% from 3.0% in December while core rate is expected to remain at 2.2%. As long as core prices continue to remain above an annual rate of 2% it doesn't reflect the conditions needed to make the case for more QE.
Therefore, in heightening speculation around more QE, we would be looking to see if the core data surprises to the downside. If we have a surprise to the upside, showing annual core prices continue to rally higher, that would make the chances of QE in the short term even more dim, especially considering the economy continues to build on its momentum to start 2012, following a better-than-expected fourth-quarter in 2011.
Impact on Dollar Index
Currency markets continue to move based on the headlines coming out of Greece, with the USD gyrating on the latest pronouncements from Greece, Brussels, and Germany.
One way to try and sidestep the risk here would be to look at the battle between the 2 safe havens - the USD and JPY, with the USD/JPY pressing its advantage following the recent release of positive US economic data. Stronger CPI data would help push the pair further higher, while weaker than expected prices can mitigate some of the recent gains for the USD/JPY since the BOJ announced more easing early in the week.
For more on the USD/JPY see today's technical update: USD/JPY - 79.55 is Next Pivot to Attack in the Next Stage of Bottoming Process
Generally, if speculation around QE takes center stage as a result of the inflation data, positive inflation data would limit the chances of more QE, a USD positive, while weaker CPI and a break of hte trend in rising core prices could undermine USD strength.
The Dollar Index bounced up off its 50% retracement of the full upswing from late October to mid-January. After finding support, the index now tested and was rejected at the 50% retracement of its counter-trend move from mid-January to early February. Will the Dollar resume its bullish move seen in the 4th quarter or will it resume its downward counter-trend move from January.
While the CPI data is not likely to have as big an impact compared to the latest headlines out of Greece, it will hold clues to the direction the FOMC will take next when it comes to stimulus.
Nick Nasad is an analyst, educator, and trader; and one of the main contributors to FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.