As the US economy starts to show signs of weakness, US based currency specialist, Patrick Reid looks at what the next year could bring for core inflation, GDP and other key figures
The largely pristine picture in the US has started to show signs of weakness and get this - it’s not about the data. It is what the market has interpreted via the Fed last week as to what the data will be like. A few small words from Jerome Powell caught everyone off guard.
The key point was when he changed the description of the rate path at being “way off neutral” to “just below”, the USD spot finally reacted because the overnight indexed swap (OIS) had priced it accordingly a couple of weeks earlier – from three hikes to just one.
I have a reliable source telling me the current band for neutral is set between 2.25% - 3.5%. The current Fed funds rate is 2.00 to 2.25. That’s 25 basis points below the bottom band and quite enough for doubts to creep in on the path for 2019. December is still a slam-dunk but desk talk is rife on a dovish hike.
That said, let’s not get too carried away. US data is still at the highs but it’s not surprising to the upside. GDP at 3% year over year, wages still firm and unemployment way below NAIRU. The CPI headline tanking, but it is merely a result of the ROC (rate of change in OIL), which let’s be frank, was a long time coming. Core CPI is as steady as a marine. See the chart below.
I did some back of the envelope calculations again (I’m a trader not an economist) and the mean year over year is 2.0. We are nudging just a little above this. Not weak by any means.
12-month percentage change in CPI for All Urban Consumers (CPI-U), not seasonally adjusted. Oct 2017 – Oct 2018
I think 2019 could be the year of bonds, but a global slow down is only natural and Powell did his best to manage this expectation. A live meeting could very well mean an end to forward guidance. The GFC muscle memory is still causing pain of course, but the one thing that’s certain is that it gives the Fed a nimble approach to act if the US catches a cold.
I’ll finish with this. Warren Buffet once said you can only see who’s swimming naked when the tide goes out. You could argue the tide is going out a little in the US, but how far is anyone’s guess.
For more, read Patrick's currency update
Non-accelerating inflation rate of Unemployment
Patrick co founded Adamis Principle to educate and mentor FX traders at all levels. He and co founder, Adam Gazzoli have both previously worked as spot traders with 30 years’ experience in hedge funds and banks.