CPI and FOMC Decision Dominate Markets Ahead of the US Session

Daily Forex Fundamentals | Written by ecPulse.com | Dec 16 09 13:11 GMT |

The outlook for inflation in the United States remains somehow unclear, as yesterday the producer price index signaled that prices increased more than forecasted on the producer level and that might indeed lead to an increase in prices on consumers, meanwhile, the Federal Open Market Committee will announce today its decision on interest rates, where it’s widely expected that the Feds will leave their benchmark interest rates steady. Starting with the consumer price index for the month of November, as the U.S. Commerce Department is expected to announce that CPI rose in November by 0.4% following the prior reported rise of 0.3% back in October, while compared with a year earlier, CPI is expected to have risen by 1.8% up from the prior reported drop of 0.2%. Moreover, core CPI which excludes prices of food and energy is expected to show an increase of 0.1% in November following the prior reported rise of 0.2% back in October, while compared with a year earlier, core CPI is expected to rise by 1.8% compared with the prior reported rise of 1.7%. Inflation is still not expected to pose any threats for the U.S. economy at least not on the short term, however, prices started to show a gradual increase amid the recent improvement in economic conditions, in addition to rising energy prices which have been pushing prices to the upside, yet still the ongoing economic slack is still expected to continue weighing down on prices, and accordingly inflation should remain subdued over the short run. Expectations for inflation over the course of 2010 still signal that inflation will remain under control, as core PCE, the Feds’ favorite indicator for inflation is expected to remain well below the 2% target for inflation, while CPI is also expected to remain within the target range through 2010 around 2%. The U.S. economy is expected to continue its recovery well into 2010, and accordingly we should expect price pressures to start mounting gradually, however, with unemployment at elevated levels near a 26-year high alongside tightened credit conditions, we might expect inflation to remain subdued. Yet on the other hand, we have the huge increase in money supply amid the hefty amounts of liquidity that were pumped into the financial system in order to stabilize conditions and facilitate lending, and that increase in money supply would normally lead to an increase in inflation, but since the velocity of money which is a measure for the circulation of one dollar within the economy is still weak, inflation still hasn’t soared as it should have in a normal situation, as the recession indeed weighed down on prices and kept inflation under control. Meanwhile, the current account balance for the third quarter will be released, the current account deficit is expected to widen in the third quarter to $107.5 billion from the prior reported deficit of $98.8 billion. Also, data from the housing market is expected to show that activity continues to rise gradually, as the housing starts are expected to rise in the month of November to 574,000 from the prior reported estimate of 529,000 back in October, while building permits are expected to rise to 570 thousand from the prior revised estimate of 551 thousand. The housing market continues to show signs of rising activity, as seemingly the endless support for the housing market has finally paid off, where the government continued to offer tax credits for first time home buyers, in addition to cheap home values which lured bargain buyers into the housing market, yet a worrying sign remains with the high number of foreclosures which continue to weigh down on activity in the housing market. Moving on, as the Federal Open Market Committee is expected to leave its benchmark interest rates unchanged at the current target range between 0% and 0.25%, as despite the ongoing improvement in economic conditions, but the economy is still fragile and there’s still a possibility of further deterioration especially as unemployment is standing around its highest level since 1983 at 10.0%. Yet investors will be also interested in hearing what the Feds have to say over the outlook for inflation, as so far the Feds have been highlighting that “inflation is expected to remain subdued for some time”, however we don’t expect that stance to change for the time being at least. The U.S. economy still has a long way to go before conditions are back to normal, as the economy will still struggle in 2010 amid elevated unemployment levels, but we should be able to see a gradual improvement in economic activity, where the economy will be able to grow over a stronger pace during the second half of 2010, however, we still believe that the U.S. economy will stop short from fulfilling its long term growth potentials in 2010, which will most likely represent a recovery year for the world’s largest economy… Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk