US CPI miss could weigh on the 90% market odds of a Dec Fed hike - ING

In what will be a pivotal test for the prospects of a Dec Fed rate hike, today's CPI data also comes at a time when there is mounting evidence pointing to a more structural low inflation problem in the US economy, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“Looking through the short-term erratic factors, it is pretty difficult to find a composite measure of US prices that has on average seen 2% annual inflation since the 2007-2008 crisis. In fact, former Fed Chair Ben Bernanke has recently noted that the level of core PCE – the central bank's other preferred inflation measure – remains 4.5% lower than where it would have been had the Fed been successful in meeting its 2% target since the post-GFC era. It’s therefore no surprise to see current FOMC members like Williams and Evans talking about potential price-level targeting in the future.”

“For markets, the message of structurally low US inflation is being heard loud and clear – with the US yield curve continuing to exert a flattening bias. Headline CPI at 2% today is just noise, while a miss in core CPI will only reinforce the current market dynamics. A miss could be more troubling for the US dollar given that we could see the 90% probability of a Dec Fed hike currently priced into markets fall quite sharply. We quite like selling USD against the G10 low-yielders (EUR, JPY and GBP) – with the global risk environment also taking a turn for the worse.”