Week ahead: US price pressures are still mounting…

Inflation, inflation, inflation. It’s the narrative that keeps on rolling. This week’s key data release, the US core PCE report, will show us just how hot it’s raging in the United States.  

Elsewhere, Canadian GDP is on the menu with things looking cautiously optimistic while we go under the hood of the Reserve bank of Australia which serves up its latest meeting minutes. 

Another hot US PCE report is probably on the way 

In data terms, the week is headlined by Thursday’s US core PCE price index release.  

Costs of consumer prices are barrelling upwards. We’ve already seen personal consumption expenditures push inflation to 40-year high. 

The PCE price index may tick higher in relation to soaring input prices. The Producer Price Index (PPI) jumped a further 0.8% in November, following a 0.6% increase in the month prior, as supply bottlenecks continue to weigh heavily on the costs of finished goods. 

Core PCE, which removes volatile energy and food prices, rose 0.4% in October. 

Now fully retired, the Fed dropped the word “transitory” as regards inflation from its December statement. Powell was bullish: “The economy no longer needs increasing amounts of policy support.”  

He also said the big risk now is that inflation is more persistent, warned of entrenching higher inflation expectations. PCE inflation for 2021 was revised up to 5.3% from the 4.2% expected in September; core PCE up to 4.4% from 3.7%. Still, though, the projections for 2022 are not that high – PCE inflation is seen moderating to 2.6% (core 2.7%) next year. Though this is higher than the level predicted in September, it may yet be on the low side. 

One consequence of rampant US inflation is the stalling of Biden’s centrepiece $1.75 trillion social spending bill. While the Bill was passed by the Senate in mid-November, it still appears to be stuck actually passing into law.  

Building back better requires cash and lots of it. But if the costs of finished goods keep on rising, even that gargantuan $1.75 trillion might not be enough to foot the bill. 

Wholesale prices rose 1.2% in November, following October’s 1.3% increase. Iron and steel prices are up 10.7%. It’s a great time for manufacturers across the US, and these high input costs are being put onto customers, whether retail or commercial. 

All the inflation metrics are red hot as we head into winter. Don’t expect a cooling any time soon.  

Watch for Canadian month-on-month GDP stats following fiscal update 

Canadian economists have been busy with a fiscal update landing on December 14th ahead of this week’s month-on-month GDP stats. 

According to the latest infodump from the Bank of Canada, Canada’s GDP rose 0.8% – much higher than September’s 0.1% growth rate. For context, Thursday’s release will be documenting November’s economic output. 

It all remains to be seen what impact, if any, the Omicron variant will have on Canada’s monthly output. I’d expect productivity to remain in the same ballpark as October’s for November’s GDP growth with any virus-induced damage expressed in later reports. 

Some other key takeaways from Canada’s fiscal update as announced by Finance Minister Chrystia Freeland include: 

• 2021/21 fiscal deficit forecast at C$144.5 billion against C$154.7 billion forecast in April. 
• Canada’s debt-to-GDP ratio forecast to be 48.0% in 2021/22, versus 51.2% seen in April, falling to 44.0% in 2026/27. 
• Real GDP growth forecast for 2021 cut to 4.6% from 5.8% in April’s budget. Growth estimates revised upwards for 2022 to 4.2% from 4.0% and 2023 to 2.8% from 2.1%. 
• Inflation forecast for the current year raised to 3.3% from 2.2% in April, 3.1% in 2022 from previous 2.0%. 

Reserve Bank of Australia policy minutes lift the lid on RBA thinking 

Tuesday’s minutes release from the RBA’s 12th meeting of 2021 will help us gauge the Australian fiscal policymakers’ intentions a little better. 

At its meeting earlier in December, the Australian central bank voted to hold interest rates at their current historic lows. This runs counter to the thinking of the bank’s cousins over in New Zealand, where the RBNZ has voted to hike rates further.  

In a post-meeting statement, RBA Governor Phillip Lowe said: “Inflation has increased but, in underlying terms, is still low at 2.1 per cent. The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. 

“This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the board is prepared to be patient.” 

Patience is the key. Some economists have latched onto the fact that Lowe excluded the year 2023 from this most recent statement. To them, this means the bank is opening the door to a rate hike sooner than expected. 

We do know that the RBA is reviewing its bond-buying programme in February. Currently, the bank is picking up bonds at a rate of AUD$4bn per month. By the time February 2022 rolls around, the RBA expects to own around $350 billion in Australian federal, state and territory government debt. 

So, the times they are a possibly changin’ for the RBA. But before making any bold predictions, it might be best to wait until this new batch of minute notes is released. We should get a better understanding of any tensions within the bank – and some more indicators of what to expect going forward. 

Happy holidays from Markets.com 

We’d like to wish all our readers merry Christmas and a happy new year. This will be our last week ahead release of 2021. Thank you for all your support and trading activity this year.  

Don’t forget – some markets are closing for the holidays. Check out our trading holidays calendar to tweak your trading diary around this year’s festive season. 

Be on the lookout for the big man with the jolly white beard, the sleigh, and the sack full of presents too. The traditional Santa Rally could be on the cards. 

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