Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: June 15 2006 03:00 | Last updated: June 15 2006 03:00
In the financial markets, there are consensus forecasts and then there are the real expectations. On the surface, yesterday's 0.3 per cent monthly rise in core US consumer prices ought to have been bad news. It certainly seems to have set the seal on a US interest rate rise later this month.
But while the consensus forecast was for a 0.2 per cent monthly gain in the core rate, investors had clearly been braced for a 0.3 per cent move. So when it came, it was not really a big surprise. A June rate rise was probably a fait accompli, in any case.
The real debate now concerns the possibility of an August move where, according to Alan Ruskin, chief international strategist at RBS Greenwich Capital, the futures market has priced in a 46 per cent probability of a rate rise.
The initial calm of equity markets in the face of the numbers may simply reflect the White Queen syndrome, after the Through the Looking Glass character who does all her screaming in advance of pricking her finger.
But it may also reflect some suspicion about the make-up of the data, with owners' equivalent rents (a somewhat notional calculation) rising0.6 per cent in May, the biggest monthly rise since 1990.
Nevertheless, Capital Economics points out that, even if shelter costs are stripped out, the core rate has risen at an annualised 3.2 per cent over the last three months.
Now that the inflation numbers are out of the way for the month, attention will shift to the growth statistics.
The market's strength earlier in the year was predicated on the Goldilocks scenario, of strong growth with low inflation. Investors know the inflation outlook has deteriorated and the recent US growth numbers have been a little sluggish.
The problem lies in deciding what would constitute good news at this stage. Would healthy economic data only give the Fed latitude to keep raising rates?
Conversely, would weak data indicate that monetary tightening was already squeezing the economy, at a time when the Fed seems committed to raise rates at least once more?
Published: June 15 2006 03:00 | Last updated: June 15 2006 03:00
In the financial markets, there are consensus forecasts and then there are the real expectations. On the surface, yesterday's 0.3 per cent monthly rise in core US consumer prices ought to have been bad news. It certainly seems to have set the seal on a US interest rate rise later this month.
But while the consensus forecast was for a 0.2 per cent monthly gain in the core rate, investors had clearly been braced for a 0.3 per cent move. So when it came, it was not really a big surprise. A June rate rise was probably a fait accompli, in any case.
The real debate now concerns the possibility of an August move where, according to Alan Ruskin, chief international strategist at RBS Greenwich Capital, the futures market has priced in a 46 per cent probability of a rate rise.
The initial calm of equity markets in the face of the numbers may simply reflect the White Queen syndrome, after the Through the Looking Glass character who does all her screaming in advance of pricking her finger.
But it may also reflect some suspicion about the make-up of the data, with owners' equivalent rents (a somewhat notional calculation) rising0.6 per cent in May, the biggest monthly rise since 1990.
Nevertheless, Capital Economics points out that, even if shelter costs are stripped out, the core rate has risen at an annualised 3.2 per cent over the last three months.
Now that the inflation numbers are out of the way for the month, attention will shift to the growth statistics.
The market's strength earlier in the year was predicated on the Goldilocks scenario, of strong growth with low inflation. Investors know the inflation outlook has deteriorated and the recent US growth numbers have been a little sluggish.
The problem lies in deciding what would constitute good news at this stage. Would healthy economic data only give the Fed latitude to keep raising rates?
Conversely, would weak data indicate that monetary tightening was already squeezing the economy, at a time when the Fed seems committed to raise rates at least once more?
posted by Carlos T Mock at 9:42 AM
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