There was an upward surprise in the US CPI data today, with the CPI exceeding the month-on-month (MoM) consensus estimate, but the surprise was nearly even more major as the CPI YoY rate just barely missed hitting 2.0% vs. the 1.8% consensus. Meanwhile, the Core CPI MoM gain was 0.248%, or nearly 0.3%, vs. the 0.2% consensus. Moreover, the six-month-long decelerating trend of the largest component of the CPI, shelter (which includes housing rent, owners-equivalent rent and other forms of shelter), reversed to acceleration. This has upward ramifications for expected future CPI results, as most economists will likely stop estimating further deceleration in the shelter component. The Fed likely agrees with this trend too, as it does not see deflation in the real world, especially in the short term with the CPI likely well above 2% YoY in September and October too (due to surging gasoline prices). This justifies its run-off decision next week and very likely a December hike.
Meanwhile, the UK inflation data surprised to the upside yesterday and the Bank of England surprisingly signaled a November rate hike this morning. This puts pressure on the ECB to follow through by clearly indicating in speeches and the next meeting that tapering will start in early 2018 and that it will not be a particularly dovish tapering. Although tapering is expected by the market, some major economists expect it to be dovishly slow, so with negative interest rates there, a non-dovish taper will likely prove a challenge to the bond market there. However, Eurozone economic growth will likely hit 2% YoY this year, after similar results for the past two years, so rising market interest rates should not present too much of a challenge. Meanwhile, with its huge trade and current account surpluses, the Eurozone can very likely remain competitive in international trade even at moderately higher levels for the Euro.
Currency markets will likely see this coordination as something that should not cause major currency volatility in the intermediate term, with the possible exception of Japan. More than any country, Japan has a CPI that is stuck not far from zero. However, economic growth has improved, so there is some pressure on the Bank of Japan (BOJ) to be less dovish. The amount of QE purchases needed to peg bond yields near zero is falling, so the BOJ is already tapering in some fashion, but it is likely that the most unorthodox monetary measures, including ETF purchases, will be addressed, as well. However, anything done in this regard will likely be quite moderate.
Of course, all of this could change if geopolitical factors turn into an impactful crisis, so markets will not likely react fully to this coordinated monetary tightening.
