This upcoming week is set to be significant, with the release of the Consumer Price Index (CPI) and the Producer Price Index (PPI) reports towards the week’s close. Alongside, attention will be on three Treasury auctions. These follow a week of robust data, signaling the resilience of the US economy.
Bloomberg Economics’ GDP Nowcast projects a fourth-quarter growth rate of approximately 2.3%. Although slower than the third-quarter’s robust 5% figure, this anticipated growth remains commendable.
When considering an approximate 3% inflation rate, the nominal growth hovers around 5%. This rate indicates a healthy economic condition, making a significant impact on the Federal Reserve’s rate decision. The market’s aggressive pricing in of rate cuts may face hurdles with such a strong nominal growth outlook.
Comparing Nominal GDP year-on-year growth to the Fed Funds rate, the figures have been relatively close. Even with an expected 5% nominal growth in the fourth quarter, these rates would nearly align. Economic pressure typically emerges when the Fed Funds rate stands 0.5% to 1% higher than nominal growth, potentially elevating recessionary risks.
The Federal Reserve is likely to maintain a patient stance, closely monitoring incoming data. The impending CPI report might influence this approach. Forecasts suggest a 3.2% increase in December, while inflation swaps indicate a slightly higher rise at 3.32%.
Analyzing past data, rounding to the nearest 0.1%, inflation swaps have tended to slightly overestimate CPI only once in the last six instances. Conversely, median predictions have surpassed actual CPI figures three times.
Considering this, if we assess previous instances where CPI exceeded expectations, inflation swaps have offered a more accurate estimation. There remains a risk that CPI could surpass the consensus of 3.2% this month, as indicated by these trends. This factor deserves attention in the evaluation of economic developments.