US

Close watch on core PCE

The volatile energy price is holding up January’s headline inflation which came in at 1.6% y/y, the slowest rate since June 2017. But core inflation, which excludes food and energy, remained firm at 2.2% for the second straight month. We feel the latest data should open the door slightly wider for the Fed to maintain its “patient” view on the monetary policy direction. In our view, the focus will be on the core personal consumption expenditures (PCE) which the Fed tracks closely. The core PCE rose 1.9% y/y in November from 1.8% y/y in October. It hit 2% in March 2018 for the first time since April 2012.

The PCE price data for December, which will be released March 1, is something we will be looking at closely. The Fed left the policy rate unchanged in January 2019 while removing from its December policy statement promises of "further gradual increases" in borrowing costs to a statement that it would be "patient" before making further rate hikes. We believe the rate hike cycle is reaching its peak. In our base case scenario, we have factored in 1–2 rate hikes in 2019

• January’s headline consumer price inflation came in at 1.6% y/y, the slowest rate since June 2017. But core inflation, which excludes food and energy, remained firm at 2.2% for the second straight month. The weaker headline inflation in January was dragged down by a sharp fall in energy cost. Gasoline price tumbled by 10.1% y/y from -2.1% y/y in December 2018.

• On the external front, the headline CPI figure is showing that inflation is well contained. However, the core inflation is telling us otherwise. The Fed, which has a 2% inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index for its monetary policy.

• The core PCE price index increased 1.9% y/y in November 2018 after rising 1.8% y/y in October. It hit 2% in March 2018 for the first time since April 2012. PCE price data for December, which will be released on March 1, is something we will be looking at closely.

• The Fed left the policy rate unchanged in January 2019 while removing from its December policy statement promises of "further gradual increases" in borrowing costs to a statement that it would be "patient" before making further rate hikes. We believe the rate hike cycle is reaching its peak. In our base case scenario, we have factored in 1–2 rate hikes in 2019.

UK

Rising wages, softening CPI bode well for economy

Headline inflation fell to a two-year low in January, dragged lower by falling energy bills and fuel. The Consumer Price Index (CPI) was 1.8% y/y in January from its a five-year peak of 3.1% in November 2017. The fall in inflation is due mainly to cheaper gas, electricity and petrol, though partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year. Meanwhile, core inflation, which excludes energy, food, alcohol and tobacco prices, stayed flat at 1.9% y/y in January

In our view, the softening inflation trend and rising wages at 3.3% bode well for the economy as it attempts to weather the effects of uncertainty. Consumers are likely to feel less of a pinch on their wallets. For the past two years, households have been squeezed between high prices and weak wage growth. Assuming there is a Brexit deal, inflation could stay below 2% in 2019 and even dip to 1.6%. If there is no deal, the outlook would be different and the Bank of England could cut interest rates as economic activity would likely take a significant hit.

• Headline inflation fell to a two-year low in January, dragged lower by falling energy bills and fuel. The Consumer Price Index (CPI) was 1.8% y/y in January from 2.1% y/y in December. Inflation peaked at a five-year high of 3.1% in November 2017, and was last at 1.8% in January 2017.

• The fall in inflation is due mainly to cheaper gas, electricity and petrol, though partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year. The latest headline inflation is now below the central banks’ 2.0% target. Meanwhile, core inflation, which excludes energy, food, alcohol and tobacco prices, stayed flat at 1.9% y/y in January.

• We believe the softening trend of inflation and rising wages at 3.3% will bode well for the economy as it attempts to weather the effects of uncertainty. Consumers are likely to feel less of a pinch on their wallets. For the past two years, households have been squeezed between high prices and weak wage growth.

• In our view, domestic inflationary pressures should pick up only modestly over the coming months amid likely limited UK growth. Assuming there is a Brexit deal, inflation could stay below 2% in 2019 and even dip to 1.6%. If there is no deal, the outlook would be different and the Bank of England could cut interest rates as economic activity would likely take a significant hit.

Source: AmInvest Research - 14 Feb 2019