Consumer inflation didn't move the dial much this past year as of April; corporate spending rose, but explanations vary; Italy moved ever closer to an improbable governing coalition; the Bank of England held off raising its base rate, citing Brexit uncertainty.
"If [the Fed is going to raise rates], it's got some time to wait because the next two moves are anticipated anyway and whether it does a third this year or early next year, that's something you can decide at a later stage"
U.S. inflation: Missing in action For a brief moment, consumer price inflation, at 2.5% for the 12 months ended April 30, looked convincingly greater than the Fed’s 2 percent target threshold. But core consumer inflation, not including volatile food and energy prices, rose a smaller 2.1% over that period. When combined with March’s 1.9% reading for the Fed’s favorite inflation reading (the PCE deflator), the overall news was less than exciting. Which could be one reason that inflation-sensitive 30-year U.S. Treasuries haven’t risen past 3.11% for at least a year, the Fed’s breakeven inflation calculation still reads under 2.17% for five years out, and the U.S. yield curve continues to break records for flatness. A contributing factor may be the strength of the dollar against virtually all major currencies, driving down costs of imported goods and services.
U.S. corporate spending: Why ask why? The Institute for Supply Management (ISM) released its latest semiannual forecast, which found that a surprisingly low one-in-three purchasing and supply executives surveyed said they’ve recently boosted their capital spending plans for the next 12 months. Within that group, only about 14% cited the recent tax overhaul as the reason; the “general business outlook” was cited as the primary catalyst.
Since these are opinions rather than hard measures, they’re even more subject to interpretation that most measures. But what counts is whether the investment actually takes place, and whether the tax windfalls are invested in future productive capacity or in increased wages, or stock buybacks intended to boost reported earnings per share.
Italy: Ever closer Billionaire kingmaker Silvio Berlusconi has endorsed the unlikely combination of the League and the Five Star Movement as partners in a yet-to-be-formed ruling coalition. As their respective leaders Mateo Salvini and Luigi Di Maio continue policy discussions into the weekend, some observers suggest that their joint platform would be significantly less extreme than the stated positions that won them the right to form a government in the first place.
League leader DeMaio was said to have consulted with Giorgia Meloni, leader of the far-right Brothers of Italy party, either to bring them into the coalition or to get a promise that they wouldn’t stand in the way of the Leagues possible move toward the center. The stakes are high; failure would most likely lead to yet another election, more uncertainty as to its outcome, and more delays in creating a government.
UK: BoE’s Brexit blink. At the beginning of the month, many still believed the Bank of England would make good on Mark Carney’s subtle but clear indication that it would raise the base rate from 0.50% on May 10. But the Monetary Policy Committee voted 7-2 to keep the rate steady, citing uncertainty created by “the exceptional circumstances presented by Brexit”. That uncertainty has only grown; each of the competing proposals for how to implement the breakup is unacceptable to at least one of the parties, and the battles over them within the Cabinet have become increasingly public, costing one member her post.
All data Source: Bloomberg
The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.
The Bank of England is the central bank of the United Kingdom.