US: Inflation potential still moderate – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that despite the structural constraints to growth and inflation that are being felt across most major economies, there are some signs of wage inflation in the US.

Key Quotes

“The tightening of the US labour market has resulted in the Altanta Fed’s nominal wage growth tracker reaching 3.6% 3m y/y in September. This reading matches that of June but this level previously hasn’t been printed since 2008. While this is a sign of improved health in the US economy, wage inflation still remains well below the peak of previous economic cycles. While median household incomes in the US are also on an upward trend, they remain below the levels recorded in 2007, ahead of the financial crisis. Consequently while we expect the Fed to raise rates in December, we anticipate that the pace of US tightening into 2017 and beyond will remain subdued.

On the back on a string of hawkish comments from Federal Reserve officials and a set of ‘sufficiently’ positive US economic data releases, the market implied probability of a December rate hike from the Federal Reserve currently stands just below 70%. On the back of the more confident outlook for interest rates, the DXY dollar index is currently trading at its strongest level since February. This recent releases of both the latest Beige Book and the September FOMC minutes are likely to have added to the supportive tone for the USD. That said, there has been little change in the market implied probability of a December tightening in recent sessions. This implies that EUR weakness has been a contributing factor behind the most recent move in the DXY.”