CPI, Empire Manufacturing, and Confidence, Busy Day for U.S. Markets!

Daily Forex Fundamentals | Written by ecPulse.com | Jan 15 10 12:54 GMT |

The U.S. economy continues to show more signs of improvement, where activity in the manufacturing, services, and housing sectors started to rebound, as the recovery seems to be undergoing indeed, however, the recovery will take some time before conditions are back to normal, while the outlook for inflation remains rather uncertain, and today markets will be focused on the CPI figures since it would provide further clues over the outlook for inflation. The U.S. Commerce Department will release today the consumer price index for the month of December, where CPI is expected to rise by 0.2% in December compared with the prior reported rise of 0.4% back in November, while compared with a year earlier, CPI is expected to rise by 2.8% up from the prior reported rise of 1.8%. Core CPI which excludes prices of food and energy is expected to rise by 0.1% in December following the prior reported flat estimate back in November, while compared with a year earlier, core CPI is expected to rise slightly to 1.8% from the prior reported estimate of 1.7%. Upside risks to inflation still hasn’t started to materialize, as the ongoing economic slack continues to weigh down on prices up to a certain extent, where elevated unemployment and tightened credit conditions are still expected to weigh down on economic growth over the upcoming period, and accordingly we should expect inflation to remain under control over the short run at least. However, over the long term the outlook for inflation remains highly uncertain, since the hefty amounts of liquidity that were pumped into the financial system in order to help promote growth and facilitate lending will eventually increase money supply, which means upside risks to inflation should rise. Also, the effect of rising energy prices will surely materialize by higher risks to inflation. The Federal Reserve Bank still expects core inflation to remain subdued over the next two years; however, it’s probably too early to tell whether inflation will remain below the 2% unspoken target set by the Feds, and we will probably see upside risks to inflation rising further as the recovery strengthens, where expectations now signal that the U.S. economy will continue to recover in 2010 before the economy can fulfill its long term growth potentials in 2011. Meanwhile, the NY Empire manufacturing index will be released today, where the index is expected to show that manufacturing activity continued to improve in January, as the index is expected to rise to 12.00 from the prior reported estimate of 2.55 reported for December. The manufacturing sector has been one of the first sectors to emerge from the recession, where the manufacturing sector expanded back in August 09 for the first time since the beginning of the recession. The manufacturing sector went back to the 1980s during this recession, as the slump in manufacturing activity was indeed the worst since the early 1980s, however, as the economy started to recover during the second half of 2009, the manufacturing sector started to show signs of stabilization, before manufacturing activity started to rise noticeably, however, we still expect the manufacturing sector to continue its recovery over the upcoming few months. Moreover, the industrial production index is expected to show that activity rose in December by 0.6% following the prior reported rise of 0.8%, while capacity utilization, a measure of how much resources are being used by factories, is expected to rise in December to 71.8% from the prior reported estimate of 71.3%. Capacity utilization is also considered an inflationary gauge, and rising activity means that inflationary pressures are building up, though the index is still rather low, but the fact that it has been rising over the past few months to reflect the recent developments in economic activity, which means that the recovery will surely increase upside risks to inflation as well. Finally, the University of Michigan will release its preliminary estimate for consumer confidence in the month of January, where consumer confidence is expected to rise to 74.0 from the prior reported estimate of 72.5, where improving economic conditions over the past few months has been reflected onto consumers, yet confidence remains somehow low, as it will take more time before conditions are back to normal. 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