The Pulse of Macroeconomics: The latest CPI and PPI data released in the U.S. last week showed increasing inflationary pressures, and retail sales also recorded relatively strong nominal growth. However, the dollar failed to maintain its high levels and instead turned downward, losing 0.4% for the week and ending its four-week rising streak. With inflation data trending hotter, why hasn't it provided sustained support for the dollar?
U.S. CPI rose 3.7% year-on-year in September, higher than the market expectation of 3.6%; core CPI rose 2.6% year-on-year, exceeding the expected 2.5%; monthly growth remained at 0.3%, but was 0.1 percentage points higher than expected. Besides energy prices continuing to be the main driver of CPI increases, housing costs, which are more sticky, showed signs of rising again, increasing 0.39% month-on-month—the largest monthly increase since April. Core goods inflation accelerated month-on-month, mainly concentrated in toys, clothing, and used cars. The September inflation data indicates that inflation risks are spreading from energy to other goods.
Besides CPI, September PPI annual growth accelerated to 6.3%, the highest since the end of 2022. Monthly growth reached 1.3%, the highest since March 2022. Core PPI, excluding food and energy prices, rose 0.7% month-on-month, far exceeding August's 0.2% increase and 0.4 percentage points higher than expected. The sharp rise in PPI indicates increasing price pressure on producers, with costs potentially further passed on to downstream consumers, pushing up consumer prices, although the extent of transmission remains uncertain.
The latest CPI and PPI show rising price pressures, while retail sales recorded relatively strong nominal growth, yet individual components showed divergence. Retail sales rose 0.8% month-on-month in September, exceeding market expectations by 0.5 percentage points. On the surface, U.S. consumer demand appears strong, but retail sales excluding autos and gasoline increased only 0.2%, significantly slower than August's 1.1%. Nominal sales growth does not necessarily mean actual demand is equally strong, but a single month's component slowdown is insufficient to confirm a broad-based weakening in consumption.
More notably, real average hourly earnings in the U.S. have recorded year-on-year declines for six consecutive months, and real average weekly earnings turned negative year-on-year for the first time in the second half of the year, indicating that inflation is eroding American workers' purchasing power.
Immediately after the CPI data release on October 14, the market's instant reaction was to expect a greater likelihood of a Fed rate hike at this month's meeting. However, concerns resurfaced about a potential burst of the AI investment bubble supporting economic growth, prompting capital to return to the bond market. As of last Friday (16th), bond yields from 1 to 30 years declined compared to a week earlier, with long-term bond yields falling faster. However, short-term yields for 1 to 6 months rose, causing the yield curve to flatten in a twisted manner, indicating market bets on further short-term rate hikes but concerns about deteriorating long-term economic prospects.
The dollar's support based solely on speculation about the timing of earlier Fed rate hikes is clearly insufficient. More importantly, whether the market expects overall monetary policy to tighten further is key. However, the market has already aggressively priced in Fed rate hikes, expecting about three more hikes by June next year. Although September's CPI and PPI data indicate rising inflation risks, they only reinforced expectations of earlier hikes, without increasing the overall expected magnitude of hikes. Currently, the market expects the Fed to raise rates by a total of 70 basis points by June next year, slightly down from 72.6 basis points at the beginning of this month. Additionally, concerns about financing risks related to AI and cautious signals from Fed officials weakened the inflation data's support for the dollar. If AI-related concerns primarily undermine U.S. growth expectations and narrow the U.S. interest rate advantage relative to other major economies, the dollar could face further pressure.
Overall, with long-term bond yields falling and market concerns about AI investment returns and the sustainability of related financing, the U.S. Dollar Index may still have room to decline. However, high oil prices, persistent rate hike expectations, ongoing instability in U.S.-Iran relations, and the absence of broad-based weakness in U.S. economic data may limit the dollar's downside. The short-term support level for the U.S. Dollar Index is at 101.5. Wu Wing Keung, Investment Strategist, The Bank of East Asia
*Articles published in ETNet, signed or unsigned, represent the authors' personal opinions and do not reflect ETNet's stance. ETNet serves as a platform for free expression of views.
U.S. CPI rose 3.7% year-on-year in September, higher than the market expectation of 3.6%; core CPI rose 2.6% year-on-year, exceeding the expected 2.5%; monthly growth remained at 0.3%, but was 0.1 percentage points higher than expected. Besides energy prices continuing to be the main driver of CPI increases, housing costs, which are more sticky, showed signs of rising again, increasing 0.39% month-on-month—the largest monthly increase since April. Core goods inflation accelerated month-on-month, mainly concentrated in toys, clothing, and used cars. The September inflation data indicates that inflation risks are spreading from energy to other goods.
Besides CPI, September PPI annual growth accelerated to 6.3%, the highest since the end of 2022. Monthly growth reached 1.3%, the highest since March 2022. Core PPI, excluding food and energy prices, rose 0.7% month-on-month, far exceeding August's 0.2% increase and 0.4 percentage points higher than expected. The sharp rise in PPI indicates increasing price pressure on producers, with costs potentially further passed on to downstream consumers, pushing up consumer prices, although the extent of transmission remains uncertain.
The latest CPI and PPI show rising price pressures, while retail sales recorded relatively strong nominal growth, yet individual components showed divergence. Retail sales rose 0.8% month-on-month in September, exceeding market expectations by 0.5 percentage points. On the surface, U.S. consumer demand appears strong, but retail sales excluding autos and gasoline increased only 0.2%, significantly slower than August's 1.1%. Nominal sales growth does not necessarily mean actual demand is equally strong, but a single month's component slowdown is insufficient to confirm a broad-based weakening in consumption.
More notably, real average hourly earnings in the U.S. have recorded year-on-year declines for six consecutive months, and real average weekly earnings turned negative year-on-year for the first time in the second half of the year, indicating that inflation is eroding American workers' purchasing power.
Immediately after the CPI data release on October 14, the market's instant reaction was to expect a greater likelihood of a Fed rate hike at this month's meeting. However, concerns resurfaced about a potential burst of the AI investment bubble supporting economic growth, prompting capital to return to the bond market. As of last Friday (16th), bond yields from 1 to 30 years declined compared to a week earlier, with long-term bond yields falling faster. However, short-term yields for 1 to 6 months rose, causing the yield curve to flatten in a twisted manner, indicating market bets on further short-term rate hikes but concerns about deteriorating long-term economic prospects.
The dollar's support based solely on speculation about the timing of earlier Fed rate hikes is clearly insufficient. More importantly, whether the market expects overall monetary policy to tighten further is key. However, the market has already aggressively priced in Fed rate hikes, expecting about three more hikes by June next year. Although September's CPI and PPI data indicate rising inflation risks, they only reinforced expectations of earlier hikes, without increasing the overall expected magnitude of hikes. Currently, the market expects the Fed to raise rates by a total of 70 basis points by June next year, slightly down from 72.6 basis points at the beginning of this month. Additionally, concerns about financing risks related to AI and cautious signals from Fed officials weakened the inflation data's support for the dollar. If AI-related concerns primarily undermine U.S. growth expectations and narrow the U.S. interest rate advantage relative to other major economies, the dollar could face further pressure.
Overall, with long-term bond yields falling and market concerns about AI investment returns and the sustainability of related financing, the U.S. Dollar Index may still have room to decline. However, high oil prices, persistent rate hike expectations, ongoing instability in U.S.-Iran relations, and the absence of broad-based weakness in U.S. economic data may limit the dollar's downside. The short-term support level for the U.S. Dollar Index is at 101.5. Wu Wing Keung, Investment Strategist, The Bank of East Asia
*Articles published in ETNet, signed or unsigned, represent the authors' personal opinions and do not reflect ETNet's stance. ETNet serves as a platform for free expression of views.
