Three Questions To Be Answered In The Week Ahead

The Greek issue has been sufficiently resolved for now that investors’ focus will shift elsewhere in the week ahead.   The answers to three questions will dominate the market’s attention.  

  •   How strong are the deflationary forces?
  •   Are the cyclical recoveries still intact?
  •   What is the outlook for Fed policy? 
  • The January inflation readings from the US, EMU and Japan will be released in the coming days.  The euro area preliminary data has already been reported.  This week’s report is expected to confirm the -0.6% year-over-year headline rate and a 0.6% core rate.   

    Germany and Spain will offer preliminary February readings.  Both are not expected to deviate much from the January pace of -0.5% and -1.5% respectively.  The monetary response, the ECB’s accelerated asset purchase plan, which will include sovereign bonds, will be launched next month.  

    Even if the ECB’s bond buying program can be successfully implemented, for which there is increasing skepticism, it is not clear that it will boost inflation.  The BOJ’s balance sheet is expanding by 1.4% a month.  In  H1 ’15 it will expand by more than the ECB’s over 18-month initial projection.  Yet, it is not clear that Japan has slayed its deflation demon.  When allowances are made for the retail sales tax increase last April, Japanese CPI is barely positive.  Neither the nation’s January report nor Tokyo’s February report is expected to change much from the previous readings.  

    Headline US CPI is expected to slip into negative territory (-0.1%) on a year-over-year basis, with a 0.6% decline in January alone.  Such a report will likely spur speculation that the Fed cannot raise interest rates with a negative headline inflation.  However, the key for policy makers is not headline inflation.  They accept that the dramatic decline in energy prices dampens inflation, but its impact on prices is transitory.  By this time next year, the bulk of the impact will be dropped by the base effect.  The core rate, which in the US excludes food and energy, is more stable and is expected to be unchanged from the 1.6% paces seen in December.  

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    Author: Travis Esquivel

    Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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