US: Uncertainty over the long-run trajectory of the economy – ING

The Sep FOMC minutes (Wed) and US CPI inflation data (Thu) will be carefully scrutinised this week as investors seek further guidance on the Fed’s near-term policy reaction function, according to analysts at ING.

Key Quotes

“While the notable uptick in the latest wage growth data has led markets to believe that a Dec rate hike is in the bag, we detect an air of caution over whether the latest batch of data is actually game-changing for the broader US economic outlook. While hawks will point to underlying inflationary pressures as evidence for further tightening, Fed doves may be wary of reading too much into the hurricane distorted figures. This dichotomy within the Fed will be evident in the Sep minutes, which once again may show little consensus on key long-run issues related to the US economy (such as the reading of secular low bond yields and easy financial conditions). Uncertainty over the Fed’s long-run policy framework is a key factor behind the depressed US rate curve.”

“Bottom line: The USD may find support from near-term data this week, but we – as well as markets – are likely to remain sceptical over the long-run trajectory of the US economy. It'll take more than one set of good data releases to convince us that markets are underestimating US fundamentals.”

“How far will the USD correct? Our current line of questioning is still ‘How far can the $ correction persist?' A rebound in US inflation and retail sales data may support the USD this week, though we still remain sceptical over whether this is actually game-changing for the broader US economic outlook.”