Sunset Market Commentary

Markets

Fed governor Waller sharpened the knives in the run-up to today’s October US CPI figures during a speech at the BoE Watchers’ Conference on the economic outlook and labor market dynamism. He set up a two-pronged approach. If the monthly (core) CPI rate improved from recent 0.3% readings, he would lean to a 25 bps rate hike at the December meeting on the simple premises that economic activity is strong, the labour market stable and inflation too high. Should core CPI print around 0.3% or even higher, then he believes that a 50 bps rate hike should be considered at the December policy meeting. In Waller’s view, hiking only 25 bps would put the Fed’s credibility at risk, a risk he is not eager to take following bad September (PCE) inflation data. There was no silver lining around them. More than 70% of the components of core PCE service prices for example, saw 12-month increases above 3% in September.

Waller’s worst-case CPI scenario materialized with core CPI rising a third consecutive month at the uncomfortable 0.3% m/m-pace (vs 0.2% consensus). That implies a 3.7% annualized 3-month pace. Excluding shelter as well from the core gauge, inflation was still running at 0.3% and broad-based. Headline CPI slowed from 0.6% m/m to 0.4% m/m, but that was worse than feared as well (0.3%). Both inflation metrics continue to diverge away from the Fed’s 2% inflation target. Annual comparisons weren’t published because data collection was interrupted by the government shutdown last year. The Waller-CPI combo flipped the debate on whether the Fed should hike in December (75% discounted at the end of last week) to the size of the rate hike. First money market participants start erring on the side of a jumbo December rate hike. The US yield curve bear steepens today with yields increasing by more than 10 bps at the 2-5yr sector of the curve. The US 10-yr and 30-yr yields are currently 7 bps and 4 bps higher. The rate support switched the balance in EUR/USD back in favour of the dollar after lower energy prices and broad risk sentiment recently helped the euro towards the first 1.1250 resistance area. The pair is currently changing hands at 1.1190. This week’s remaining scheduled Fed speakers immediately gain greater importance to see whether Waller’s 50 bps call finds broader backing. Dallas Fed Logan, Kansas City Fed Schmid, Philly Fed Paulson and Washington-based Bowman are all on today’s remaining line-up.

News & Views

Norwegian inflation rose 0.3% m/m in October, down from a 0.5% pace in September. In y/y-terms, headline CPI quickened to 3.6% from 3.4% vs 3.7% expected. CPI adjusted for tax changes and excluding energy rose by 0.3% m/m in an acceleration that was slower than expected (0.4%) from the 0.2% in September. The annual core CPI figure slowed from 3% to 2.7%. While above the 2% Norway’s central bank is targeting, it eases some pressure to act. The Norges Bank last week kept the policy rate unchanged at 4.5% but has hiked twice so far this year. It also expressed willingness to raise rates further if the inflation outlook deteriorates while being mindful of the impact that would have on the economy. Money market pricing through March27 does not suggest more tightening is in store. The Norwegian krone loses ground today. The currency has been trading on the back foot since the start of the month, in line with a significant correction on oil prices. EUR/NOK is currently filling bids around 10.61.

Hungarian CPI inflation picked up from 0.2% in September to 0.4% in October, bringing the y/y reading to 2% vs 1.6%. Core inflation (ex. indirect taxes) rose by 0.3% m/m and 2.1% y/y with other gauges remaining at a more elevated 3.4% (ex. processed food) and 3.9% (sticky price CPI). Services inflation accelerated to 5.2% y/y (0.2% m/m), with particularly strong increases in amongst others taxi fares, postal services & personal care services. Our in-house nowcast sees inflation in this category approaching 6% YoY by the end of the winter and projects inflation to hover around 2% for the remainder of the year. The Hungarian forint loses some ground, though in a move unrelated to the CPI. EUR/HUF trades at 363.65, remaining firmly within a narrow sideways trading range.