Dollar, bond yields dip amid benign U.S. inflation data

16 July, 2017, 01:26 | Author: Gladys Mathis
  • Fed chairman's comments saw dollar crash. Tyrone Siu  Reuters

Consumer prices in the USA came in unchanged in the month of June, denting expectations the Federal Reserve will again raise interest rates this year. And the year-over-year core CPI gain was just 1.7%. Other data on Friday showed industrial production picked up in June, driven by a surge in oil and gas drilling.

Turning back to the economic data, consumer price inflation fell to a 1.6 percent annual rate from 1.9 percent prior.

Policymakers are confronted with benign inflation and a tight labor market as they weigh a third rate hike and announcing plans to start reducing the central bank's $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities. The core CPI increased 1.7 percent year-on-year after a similar gain in May.

The Bank of England said in its May inflation report that CPI would peak at 3% later this year, as the pound's slump following the Brexit vote causes price tags on everyday items to tick higher. Financial markets were pricing in a 47 percent chance of a 25 basis point rate hike in December, down from 55 per cent before the data, according to CME Group's FedWatch program.

The greenback reversed from an early more than a 2-week high of 0.9701 against the Swiss franc, edging down to 0.9635. Weak retail sales, meanwhile, signals that consumers have not responded to higher wage gains.

Up until this week, Fed officials had translated the recent moderation in prices as transitory but following Yellen's dovish tilt on Wednesday and today's weak numbers, policy makers will now have to reconsider whether additional rate hikes are warranted this year.

Given the present outlook, we expect the Fed will likely raise rates another 25 bps this year as well as begin the process of slowly unwinding its balance sheet sometime in the fourth quarter.

Lower costs for gas, airline tickets, new and used cars and wireless mobile phone plans kept USA consumer prices flat in June, evidence that inflation remains muted. The UK's FTSE index was trading higher by 0.88 percent, while French CAC 40 Index rose 0.88 percent.

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Other currencies including the Australian dollar gained 0.3 percent to 0.7759 extending weekly gain to 1.9 percent, its biggest since period ended March 17.

Americans also paid more for hospital visits and prescription medication, as well as motor vehicle insurance. Retail sales of gasoline were down 1.3%, based largely on lower prices. Inflation came-in flat versus an expected.2% gain, and retail sales fell by.2% against the expectation for a.1% gain. Food and beverage stores were down 0.4%, department stores were down 0.7% and restaurant sales were down 0.6%.

After the report, which was released simultaneously with retail sales for the same month, the dollar weakened.

The continued drop in sales surprised economists, who had expected sales to inch up by 0.1% compared to the 0.3% decrease originally reported for the previous month. Meanwhile, growth and inflation has started to show with more consistency in Europe and the United Kingdom, and this has led to even more deductive weakness in the Greenback as traders shift rate hike bets in the Euro and British Pound.

"Dollar-yen has got a lot more downside and it could easily go to 110 yen before the summer is out, in fact the next few weeks, especially with USA yields heading lower", Franulovich said.

The University of MI is due to release its preliminary report on consumer sentiment in the month of July.

Inflation is expected to remain at its highest level in almost four years, as rising prices on the back of the Brexit-hit pound continued to squeeze British households. The Atlanta Federal Reserve is forecasting GDP to have risen at a 2.6 per cent rate in the second quarter.


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