Inflation Upends Central Scenario

An emerging theme of disappointing inflation readings is something to keep a close eye on.  USD is down across the board amid month-end rebalancing. US consumer confidence is up next. The Weekly Premium video is posted below for subscribers, containing some crucial corrections to previously made trade focus ideas.

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The undeniable theme of the past 10 years in central banking is undershooting inflation while repeatedly overestimating inflation pressures. It's been nearly universal across developed market regions with rare manifestations of higher inflation only due to FX weakness or commodity rallies.

The trend appears to be continuing. In Monday's US PCE report, core inflation was 1.55% y/y compared to 1.7% expected with the prior also revised lower. The inflation numbers were also soft in Friday's GDP report.Europe is also struggling with low inflation and another round of data is coming up later this week.

For most of the past decade, central bankers have been content to push out promises another year on the hope that a tighter jobs market would boost prices. That faith has been shaken, and it's causing a re-think at the Fed and globally.

There is a growing worry that central banks will go into the next recession without ever having hit their targets. That's dragged inflation expectations lower and leaves them vulnerable in the next downturn. Influential Chicago Fed President Charles Evans is increasingly highlighting this risk, along with the NY Fed's Williams.

The solution may be to allow or engineer above-target inflation for a period. The hope a few months ago was undoubtedly to simply leave rates unchanged and maintain a patient approach for longer than would normally be warranted. Yet,  with prices trending lower pressure may galvanize to cut rates.

For now, policymakers will continue with patience as stock markets hit fresh records but hard questions are coming whenever the next economic or market stumble hits. It will be interesting to note how this week's Fed statement adjusts to the latest slowdown in inflation.

The day ahead features a healthy dose of economic data including US consumer confidence, pending home sales, the Chicago PMI and the Case-Shiler house price index. Canadian scheduled news includes February GDP and Poloz at parliament.