Morning Commentary: U.S. Inflation on the Rise

Foreign Exchange - Morning Commentary

U.S. Inflation on the Rise

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
U.S. PPI for October came in way above expectations at 0.6% against expectations of a gain of 0.2%. Ex-food and energy also saw a sharp rise of 0.5%. PPI YoY has now risen to 2.9% from the previous month’s reading of 2.6%; ex-food and energy has also seen the YoY rate jump to 2.6%. Price pressures have been slowly building in the pipeline due to solid economic demand and increased tariffs pushing prices ever so slowly higher. CPI data comes out next week and is considered a more important indicator of inflation.
Regarding the markets, the normal knee-jerk response to high inflation is to see higher interest rates, but that is not the case today. A combination of a much weaker equity performance overnight along with a continued collapse in the price of oil has sent markets into a risk-off mode with weaker equity prices, weaker commodity prices, and lower interest rates. The strong U.S. equity performance on Wednesday had no coat-tails and appears to be just a one-off event at this time.
The other key story is about oil...oil prices have gone into a free-fall. On October 3, oil hit a new high of $76.72. In slightly over a month, prices have fallen to $59.80…the last 10 days saw consecutive price declines with many analysts saying that oil has now entered a bear market. A number of factors are at play causing this sharp reversal; Saudi Arabia and a few other countries have increased production, stories about a potential OPEC break-up, and last night’s news about a federal judge blocking the Trump Administration’s permit to move forward on the Keystone XL have added to the negative price pressure.
  • The U.K. reported Q3 GDP, and it came in quite strong at 0.6% which is the fastest pace since the end of 2016. Q2 GDP came in at 0.4%; the YoY rate now stands at 1.50%. In addition, the U.K. trade deficit for September came in with a smaller deficit than expected, but industrial production was flat for September. The British pound is nearly unchanged from overnight.
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