U.S. indices are expected to open moderately higher on Tuesday, extending impressive gains at the start of the week ahead of the latest batch of inflation data which will attract plenty of attention ahead of next month’s FOMC meeting.
While the Federal Reserve has shown a willingness to overlook the current low levels of inflation, the inflation numbers could still be key when it comes to its decision on whether or not to hike rates in December. Any sign that deflationary pressures are intensifying could encourage policy makers to hold off for a month or two, particularly if these pressures are being seen in areas that are not viewed as economically stimulative.
Temporary deflationary pressures in areas such as energy and food are not seen as being as damaging to consumer inflation expectations and spending habits which is why the Fed is not overly concerned by the lower inflation readings. I’m sure its view would change if we saw a shift here. The strong dollar is seen as being a significant headwind for inflationary pressures with imported goods also added to the low inflation environment. This is likely to be heightened in the months ahead following the more than 7% appreciation in the dollar against the euro over the last month, and 6% gain against a basket of currencies.
This morning’s inflation data from the U.K. continued to show deflationary pressures persisting but these are likely to abate in the coming months as last year’s decline in energy prices begin to fall out of the data. Food prices continue to weigh on the inflation number and this could continue for some time as the U.K.’s big four supermarkets continue to try and compete with discount stores that have successfully stolen market share in recent years. As is the case with the U.S., the strong pound continues to add to the deflationary pressures although given the Bank of England’s new dovish stance on interest rates, this may be less of a problem for the U.K. going forward.
It should be noted that today’s inflation data for the U.S. is not the Fed’s preferred measure of inflation but that in no way means it should be underestimated. It is still one of the earliest indicators of inflation that we get and could give an important indication of what we can expect from the core personal consumption expenditure price index – the Fed’s preferred measure.
The S&P is expected to open 7 points higher, the Dow 55 points higher and the Nasdaq 20 points higher.
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