The big data points of the morning have been inflationary prints out of the U.S. and the U.K; with both showing gains compared to prior prints. Inflation for the month of September in the United States printed at 1.5% versus last month’s 1.1% number; core inflation came in at 2.2%, a bit below the expectation which was the same as last month’s print of 2.3%.
In the U.K, inflation came in above expectations, printing at 1% versus an expectation of .9% and a prior print of .6%; while core inflation showed at 1.5% versus an expectation of 1.4% and a prior print of 1.3%.
The big takeaway from this morning’s data is the fact that inflation has begun to creep-in to the U.K. economy after the ‘sharp repricing’ in the value of the British Pound around the Brexit referendum; while the United States remains on a path to stable, increasing, albeit weaker-than-desired inflation. The net result of these more robust inflationary prints have seen global stock prices move higher, and we’re looking at the bounce off of support in the S&P 500 this morning.
Chart prepared by James Stanley
But higher inflation doesn’t necessarily amount to trends in a currency, does it? While inflation is often a direct driver of spot rates, this relationship doesn’t always hold true. The more prominent driver of currency prices are interest rates. In a normal environment, interest rates will be adjusted based on inflation; with rates moving higher as inflation ticks up and rates driven lower as inflation tones-down. This can also carry impact across markets, such as equities or even commodities; as higher rates that often come with stronger inflation makes for a more difficult or ‘tighter’ operating environment.
So, while inflation usually displays a type of direct relationship with prices, there’s a middle-man (or woman) here: The Central Bank that devises rate policy based on inflation and/or employment expectations. And that’s where the water begins to get muddied at the moment regarding both the U.S. and U.K. economies.
