US inflation surprises to the upside

Firms' price plans point to further increases

Chart of the Day

The US data showed inflation was higher-than-expected at 1.2% in November, while core inflation was 1.6%. Those rates are not exactly high, but are still stronger than many expected they would be just six months or so ago given the huge drop in demand. Despite that slump in demand, firms’ pricing plans imply core inflation will swiftly recover to 2% early next year. The key issue for the Fed is selling price expectations might rise even further as the economy recovers, which could leave inflation on course to surpass 2%. Now the Fed has an average inflation target, that is of course kind of the point. But the communications challenge and the risk of losing credibility could still pose some issues.

Macro

The jobless claims data were very disappointing, showing a jump in initial claims back above 850k last week. Only part of that can be explained by catch up from the holiday week, which had reduced claims the week before.

The US fiscal deficit was, surprisingly, $63bn smaller in November than it was in November last year, as outlays dropped by 16% YoY.

UK GDP is taking a very long time to rebound, still down by over 8% YoY in October. For some context, US GDP was down by nearer 3.5% YoY in Q3.

The UK export situation looks particularly dire.

The ECB extended its emergency lending and asset-purchase programs yesterday largely as expected, which means its balance sheet is on track to continue growing, potentially at a faster rate than the Fed’s. At the current rate, the Bank of Japan’s balance sheet will overtake the SNB’s.

Markets

Despite highlighting its concern about the strength of the euro, and how that might weigh on the economy, the ECB failed to talk it down - it rose by 0.5% against the USD. By contrast, Brexit concerns have weighed on the GBP.

The Australian dollar continues to outperform, rising by near 1% against the USD and safe-haven Swiss franc and Japanese yen.

That’s partly due to the recent surge in the iron ore price, Australia’s key export. Part of the recent rise has reflected supply concerns, but the sharp increase in copper prices suggests demand, from China in particular, is probably the key driver.

Elsewhere, the Brent oil price jumped above $50 yesterday for the first time since the pandemic started. The rise in oil prices has been good news for the Canadian dollar, which is now the strongest against the USD since 2018.

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