We have been talking about it for nearly two weeks and inflation day has finally arrived.
In what may be considered the most hyped consumer price index release in recent memory, the release did not disappoint fundamental data thrill seekers. U.S. consumer prices rose by more than projected in January, adding to signs of an inflation pickup that has roiled financial markets this year. CPI showed a 0.5% increase month over month in January. The so-called core reading that excludes food and energy costs also increased above forecast. For the year, inflation is up 2.1%, higher than the 1.9% expectations. An uptick in price pressures will boost the chances that the Federal Reserve will raise rates three times in 2018, and possibly a fourth time as well. As such, the greenback is gaining across the board.
A separate report showed that U.S. retail sales unexpectedly declined in January. December’s print was also revised lower, according to the Commerce Department. The data is a potential troubling sign for the U.S. economy as purchases slowed even as wages increased. Overall, sales fell 0.3%, the biggest decline since last February.
The Euro is falling against the U.S. dollar in early trading on broad dollar strength. However, slightly poor fundamental data should also keep the common currency down. The second estimate of growth by Eurostat, the statistics agency, confirmed that GDP grew by 0.6% in the fourth quarter of 2017. Despite the slightly softer end of the year, the Eurozone had an impressive 2017 which helped the common currency rally 15% against the U.S. dollar throughout last year.
The safe-haven Japanese yen experienced whiplash overnight as the currency dances near its strongest level versus the U.S. dollar since November 2016. We noted yesterday that some policy makers have made their discomfort with the quick rise of yen known. However, it is worth noting that Bank of Japan governor Harukiko Kuroda has been relatively quiet. We expect Kuroda to stay on the sidelines until the JPY strengthens another two percent. A continued rebound of global equity markets is likely to help the yen carve out a bottom and rebound modestly over the coming weeks.