Inflation in the US cooled down. The Fed is expected to make 50 bps rate hike on Thursday.

Slower US CPI to weaken dollar with 50bps rate hike likely

Inflation Moderated

• Inflation continued its downward trend after peaking at 9.1% y/y back in Jun’22. In Nov’22, it eased to 7.1%y/y from 7.7%y/y in Oct’22 which is well below consensus expectation of 7.3% y/y. It was the slowest 12-month pace since Dec’21. This brings the year-to-date inflation to 8.3%.

• The core inflation which excludes volatile energy and food prices, rose 6.0% y/y in Nov’22 from a year ago, easing from a 6.3% y/y gain in Oct’22. September’s 6.6% increase was the biggest jump since August 1982.

• On a month-on-month basis, prices softened significantly. The CPI increased 0.1% in Nov’22 compared with 0.4% in Oct’22.

• Core CPI rose 0.2% m/m in Nov’22, down from 0.3% m/m in Oct’22 and 0.6% in Aug’22 and Sept’22.

Energy Prices Fell But Food Prices Rose

• Drop in energy prices helped keep inflation at bay. The energy index declined 1.6% for the month, due in part to a 2.0% decrease in gasoline.

• But food prices rose 0.5% and were up 10.6% from a year ago. Even with its monthly decline, the energy index was higher by 13.1% from Nov’21.

Cooling Inflation Eases Fed’s Pressure

• We believe the cooling inflation will boost the markets and take pressure off the Fed for raising rates. It will ease households whose finances have been punished by higher prices that ate into their disposable income. This is especially true for lower-income households who are disproportionately hurt by inflation.

• We are of the view that for the Fed, the key question going forward is not just whether inflation will slow, but how quickly and how completely it will come down. Fed’s worry that if price increases remain rapid for a long time, consumers could begin to expect that to continue. They might demand high wage increases in response. And if they win those raises, their employers may institute more regular and rapid price increases to cover climbing labour bills. So, expectations for fast inflation could help make that a reality.

• While most measures of inflation expectations have remained fairly stable so far, we feel the policymakers do not want to assume that they will stay that way.

Latest CPI Offers Encouragement to Fed

• But the latest inflation data appears to offer policymakers some signs for encouragement with some reasons for continued concern. Inflation in food moderated and energy costs fell, which helped to pull inflation lower.

• We now feel it makes harder for the Fed to dismiss the further slowdown in November inflation. And so, the Fed on Wednesday is widely expected to raise a key short-term interest rate by 50 bps. It would be a step down from the 75 bps hikes in the prior four meetings stretching back to June.

Dollar Could Lose Momentum Earlier

• On this note, we expect the dollar play to lose momentum. This could mean the peak of the dollar could be reaching much earlier than our expectation in 1Q23. Much would now depend on the Fed’s decision and tone in the coming FOMC meeting on Thursday.

Strengthening Mode for Ringgit

• The dollar index could come down to 102.5 - 103.0 by end 2022 as our base case. This should see ringgit strengthening to around 4.30- 4.35 as our base case.

• Potential strengthening of ringgit to 4.25 - 4.30 is likely to happen besides the weakening of the dollar is the stable political environment and expectations of a majority vote to be obtained on 19 December by the current Prime Minister when the Parliament convenes, a move viewed as bold and to get the mandate to steer the economy from the ongoing challenges.

Source: AmInvest Research - 14 Dec 2022