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World Week Ahead: Yellen sees higher inflation

Monday 16th October 2017

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Investors will eye any fresh takes on the latest US inflation data from Federal Reserve officials speaking this week as well as a slew of US quarterly corporate earnings including from Goldman Sachs. 

On Sunday Fed Chair Janet Yellen underpinned bets the central bank will raise interest rates once more this year, saying “the ongoing strength of the economy will warrant gradual increases.”

“My best guess is that these soft readings will not persist, and with the ongoing strengthening of labour markets, I expect inflation to move higher next year,” Yellen said in prepared remarks for the Group of Thirty’s International Banking Seminar in Washington. 

“Most of my colleagues on the FOMC agree,” Yellen noted. 

Last Friday, the Dow Jones Industrial Average, the Standard & Poor’s 500 Index and the Nasdaq Composite Index all closed at record highs as reports showing weaker-than-expected US inflation bolstered optimism the Federal Open Market Committee might hike interest rates slower than anticipated. 

“To be sure, our understanding of the forces that drive inflation is imperfect, and we recognise that this year's low inflation could reflect something more persistent than is reflected in our baseline projections,” according to Yellen. “The biggest surprise in the US economy this year has been inflation.”

Friday’s Labour Department report showed that its so-called core consumer price index, which excludes food and energy, increased 0.1 percent in September, down from 0.2 percent in August. 

“The presumption that, with a softer inflation print, it would mean that maybe the Fed is not going to be as aggressive as people expected,” Chris Verrone, head of technical analysis at Strategas Research in New York, told Bloomberg.

Even so, investors still expect a December rate hike. A Commerce Department report on Friday showed retail sales climbed 1.6 percent in September.

“The firmness in retail sales should override the enduring mystery of low inflation to spur a December Fed rate hike,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, told Reuters. 

Yellen is slated to deliver a lecture on Friday in Washington.

Other Fed officials speaking this week include Neel Kashkari today, Stanley Fischer, William Dudley and Robert Kaplan on Wednesday and Loretta Mester on Friday.

The latest US economic data scheduled for release include the Empire State manufacturing survey, due today; import and export prices, industrial production, and the housing market index, due Tuesday; housing starts, Atlanta Fed business inflation expectations, and the Fed's Beige Book, due Wednesday; weekly jobless claims, Philadelphia Fed business outlook survey, and leading indicators, due Thursday; and existing home sales, due Friday. 

Wall Street’s rally has taken forecasters by surprise. At 2,553, the S&P 500 now sits 53 points above the most optimistic of the 18 predictions that Bloomberg compiled at the start of 2017.

“Most clients are still skittish and bitter because they missed the rally and they’re waiting for the pullback,” Brian Belski at BMO Capital Markets told Reuters. “When you’re looking for a correction, one rarely happens.”

For the week, the Dow gained 0.4 percent, the S&P 500 rose 0.2 percent, while the Nasdaq added 0.2 percent. 

US companies set to release their latest results this week include Morgan Stanley, General Electric, Netflix, CSX, United, Verizon, and General Electric. 

In Europe, the Stoxx 600 Index ended Friday with a 0.4 percent advance from the previous day’s close.




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