How serious are the inflation concerns?
Yesterday after the ECB meeting, Mrs. Laggard warned finally that inflation can even grow in the short-term and can be a bit longer than previous expectations. This is what we can see in today's published CPI numbers. European CPI in October increased by 4.1%, much higher than 3.7% of estimates and 3.4% of the month before. With this inflation, yesterday's ECB President Lagarde's comments can signal an important change in outlook on interest rates.
And now, we are waiting for the US personal income and spending report for September. Market expectation is to see personal income decreased 1.0% in September as one of the effects of expiring the unemployment benefits at the beginning of the month.
For spending numbers, we look for a 0.5% monthly gain in September. Reasons for that are the earlier published Retails Sales and Service PMI, which both were better than estimates. The retail sales data came in better than expected for the month, and high-frequency measurements of services activity have improved.
However, this increased spending, should not be taken as an increasing the power of consumer spending, because in fact, with higher prices, they may even bough fewer products and services, and numbers are just telling us the amount of sell, by $ and not the volume of products and services.
Inflation in past months has been increasing, as businesses pass their higher costs onto consumers. In reality, we expect higher prices can be the reason for the gain in spending numbers and forecast the real PCE deflator advanced 0.4% in September, which means that real personal spending declined by 0.1%.
As a market reaction, we can see that the USD index trying to recover itself from yesterday's loss, affected by the strong Euro. Getting closer to the FOMC upcoming meeting can increase the risk of tightening policy and lift the US dollar. From the technical point of view, we can see RSI flat around 50-level with flat OBV trend line, however, both of them returned from earlier deep, with increasing price can signal possible return. For higher levels, DXY needs to pass the 93.80 mark.
