The U.S. Bureau of Economic Analysis gave the Federal Open Market Committee another reason to sing, “Should I Stay or Should I Go?” this morning as the Bureau presented its read on changes in consumer price levels. The Personal Consumption Price Index, the preferred price level barometer of the Federal Reserve System, increased 2.8% between January 2023 and January 2024.
While prices for services such as housing, food, and utilities increased 3.9%, prices for goods decreased 0.5%. Getting a little granular, food prices increased 1.4% and energy prices decreased 4.9%. If we exclude food and energy (why the BEA excludes the basics of life has something to do with price volatility and what not) the PCE price index increased 2.8% from a year ago January.
The foreign exchange and bond markets do not appear to see a major event in these numbers. At 8:13 am today, foreign exchange and bond market data reflected the following:
GBP/USD=1.2637 EUR/USD=1.0825 USD/JPY=150.1300
German 10-year bund=2.50%
US 10-year bond=4.31%
UK 10-year gilt=4.24%
Japanese 10-year bond=.70%
By 8:31 am after the BEA announcement, the markets reflected the following:
GBP/USD=1.2644 EUR/USD=1.0831 USD/JPY=150.0800
German 10-year bund=2.49%
US 10-year bond=4.31%
UK 10-year gilt=4.24%
Japanese 10-year bond=.70%
How the Federal Open Market Committee incorporates the 2.8% year over year increase in prices is anyone’s guess. In the near past, the Committee’s voting members have commented that a two percent inflation rate need not exist at the moment in time when a decision to cut the interbank overnight rate is made. The decision can be made to trim the engine and go to ten-degree flaps as the economy approaches the two-percent target runway. FOMC members have been cautioning the markets that the markets should hold their horses as the FOMC waits for best data.
The data appears to say that the FOMC will maintain some sort of glide path. How much more the FOMC trims the engine will be seen at the March 19-20th FOMC meeting.
How are you incorporating these potential FOMC decisions into your forward exchange contracts?
Alton Drew
29 February 2024
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Disclaimer: The above blog post is not intended as legal or financial advice. Please retain a lawyer and/or financial advisor before making any investment decision.
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