US: On the brink? - ING

Strong US inflation and retail sales look set to cap a strong run of data that have boosted the chances of a December Federal Reserve interest rate rise, according to James Knightley, Chief International Economist at ING.

Key Quotes

“Today’s US consumer price inflation and retail sales figures will set the tone for the coming week with both expected to help nudge interest rate hike expectations higher.”

“Headline inflation is likely to receive a strong boost from gasoline prices due to both higher oil prices and the shutdown to refineries relating to Hurricane Harvey. Core inflation is expected to be more muted, posting a rise of 0.2% MoM, but the PPI report suggests there may be some upside risks. Either way, the annual rate of inflation is likely to move higher. Under our base case, we think annual rates of consumer price inflation would rise to 2.3% for headline and 1.8% excluding food and energy. This would suggest inflation is broadly in line with the Federal Reserve’s 2% target.”

“Retail sales, meanwhile, is expected to post very robust growth of 1.4% MoM with risks being to the upside for that number. Car sales rose to a twelve year high last month while higher gasoline prices will boost the value of fuel sales. Add in distortions relating to hurricanes – people replacing lost items – and it is likely to be a bumper report.”

“Looking further ahead and next week’s industrial production report should rebound following depressed output in August, again relating to hurricanes. The ISM report is at a 13 year high, which suggests the sector is in great shape, with dollar weakness and strengthening global demand boosting the outlook.”

“Federal Reserve doves will presumably argue that the data aren’t going to be particularly “clean” because of storm distortions and that they will want to see more strong reports before being convinced of the arguments for a December hike. However, with the jobs market looking healthy and pay picking up we think the majority of Fed voters will come down in favour of a December 13 rate rise. After all, growth is good, inflation is close to target, financial stability risks haven’t disappeared and equity market valuation do look “somewhat rich”. Consequently, we look for two more rate rises next year.”

“The main risk to our projections is the threat of an economically disruptive government shutdown in December given the divisive nature of politics in the US right now. Previous instances of gridlock have seen hundreds of thousands of workers furloughed, the US being downgraded and equity markets correcting sharply. Should this be repeated the Fed would likely take a cautious approach and delay tightening until the situation is resolved.”