Inflation surges

Inflation is rising, with CPI climbing steeply above the Fed’s 2% target. But core CPI excluding energy and food remains stable.

Consumer Price Index

Job gains were the lowest since May 2016.

Job Gains

But the unemployment rate fell to a low 4.5%.

Unemployment

Hourly wage rate growth has eased below 2.5%, suggesting that underlying inflationary pressures are contained.

Average Hourly Earnings Growth

The Fed is unlikely to accelerate its normalization of interest rates unless we see a surge in core inflation and/or hourly earnings growth.

Gold and the $1200 ‘support’ level

Barrick Gold failed to break resistance at 13.50 and looks set to continue ranging between 10.00 and 13.50. The consolidation is not an indication of reversal in the primary down-trend.

Barrick Gold

Inflation-adjusted price of gold (USD price divided by US consumer price index) is well above its historic long-term average, indicating that the bear trend is likely to continue.

Spot Gold

On the daily chart spot gold recovered from its March test of primary support at $1140, but has encountered strong resistance around $1200/ounce. 13-Week Twiggs Momentum continues to oscillate below zero, suggesting continuation of the primary down-trend. Reversal below $1180 would warn of another test of $1140, while breach of the primary support level would signal a decline to $1000/ounce*. Breakout above $1220 is unlikely, but would signal a (bear) rally to $1300/ounce.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Inflation outlook

March consumer price index (CPI) is due for release on Friday. Producer prices, released Tuesday, ticked upwards after a sharp December/January fall on the back of plunging crude oil prices.

PPI Finished Goods

Average hourly earnings growth (non-supervisory manufacturing jobs), however, retreated below 1.0%.

Average Hourly Earnings

CPI is likely to remain heavily affected by oil prices, but core CPI (excluding food and energy) is expected to remain close to the Fed’s target of 2.0%.

CPI and Core CPI

Deflation in Australia?

The Eurozone experienced negative CPI growth over December/January.

CPI EU

Australia shows consumer price growth declining at the end of 2014. The next CPI update (Q1 2015), at end of April, is likely to reflect further slowing.

CPI Australia

Declining inflation expectations reported by Westpac (in the 0 to 5% range) tend to support this.

CPI expectations Australia (0 - 5% range)

CPI unwinds as the Fed runs out of “patience”

From Seeking Alpha:

The euro fell to a fresh 12-year low on Wednesday, extending a broad decline just days after the ECB launched its €1T bond-buying program, while the dollar index soared to its highest in more than 11 years at 98.95, buoyed by expectations that the Fed could soon lift U.S. interest rates. Nearly all now believe the FOMC will remove the word “patient” from its policy statement after its March 17-18 meeting, opening the door for a rate increase in June.

Not so fast. US consumer price growth (annual % change) to end of January 2015 fell below zero.

US CPI

Core CPI is slowing at a far gentler rate because it excludes energy prices (as well as food).

CPI Core

Wage pressures in the manufacturing sector are declining, despite solid job numbers, indicating there is still plenty of slack.

Manufacturing Hourly Earnings

With inflationary pressures easing, why the haste to raise interest rates? I believe that Janet Yellen will move when the time is right. And not before.

Falling crude threatens gold

Nymex Light Crude broke long-term support at $76/barrel, signaling a further decline. Sharply falling 13-week Twiggs Momentum reinforces this. Brent crude is in a similar down-trend. Long-term target for WTI is $50/barrel*.

Nymex Crude

* Target calculation: 80 – ( 110 – 80 ) = 50

Supply is booming and OPEC members appear unwilling to agree on production cuts [Bloomberg]. Goldman Sachs project WTI prices of around $74/barrel in 2015 [Business Insider], but the following chart of real crude prices (Brent crude/CPI) suggests otherwise.

Nymex Crude

Prior to the 2005 “China boom”, the index seldom ventured above 0.2. The subsequent surge in real crude prices produced two unwelcome results. First, higher prices retarded recovery from the 2008/2009 recession, acting as a hand-brake on global growth. The second unpleasant consequence is a restored Russian war chest, financing Vladimir Putin’s geo-political ambitions.

I suspect that crude prices are not going to reach the 2008 low of close to $30/barrel, but the technical target of $50 is within reach. Given the propensity of gold and crude prices to impact on each other, the bearish effect on gold could be immense.

CPI now moves balance of probabilities for next rate cut from December to November – Westpac

In the August Statement on Monetary Policy the Bank [RBA], relying on two recent prints of 0.9%qtr for underlying inflation, forecast that annual core inflation would print 3.25% in both 2011 and 2012. We are now confronted with the reality that annual core inflation for the year to September 2011 has printed 2.47% with a reasonable estimate that given the slowdown in the economy the fourth quarter will print around 0.5%qtr. That will allow the Bank to lower its inflation forecast for 2011 to 2½%yr with a similar outcome likely in 2012.

Given the Governor’s recent statement that an improving inflation environment allowed scope to ease policy it now seems almost certain that Westpac’s forecast which was made on July 15 — that we could expect a rate cut by the end of 2011 — will prove to be correct.

In fact given the Bank’s previous record of moving rates every November for the last five years and given that the case for a rate cut is indisputable the balance of probabilities has now moved to a November cut from our original call of December.

via Westpac Economics – first impressions