3 Numbers: U.S. CPI Headed For Two-Year High

The pace of data releases picks up on Wednesday, including the December update on unemployment in the UK.

Later, two US numbers for December will set the tone for trading via releases on consumer inflation and industrial production.

UK: Unemployment Report (0930 GMT): Brexit really does mean Brexit, Prime Minister Theresa May reaffirmed in yesterday’s speech.

She also advised: “I can confirm today the government will put the deal to a vote in both houses of Parliament before it comes into force." It’s still unclear what the impact of leaving the European Union will have on the UK economy beyond the immediate future, but for the moment the numbers show little, if any repercussions.

Last week, for instance, the National Institute of Economic and Social Research (NIESR) estimated quarterly GDP growth through December at 0.5% – holding steady at an average rate for 2016.

The resilience of Britain’s economy in the wake of Brexit has forced economists to revise previously gloomy forecasts.

Notably, the IMF this week upgraded its outlook, hiking its estimate for growth in 2017 by a hefty 0.4 percentage point to 1.5%.

There’s still plenty of uncertainty surrounding Brexit, including the implications for growth in the months and years ahead. But at least it’s now clear that a soft Brexit, for good or ill, is out.

Meantime, today’s unemployment data for December is expected to offer a comparably upbeat profile relative to the previous month. The jobless rate will remain unchanged at a low 4.8%, according to the consensus forecast via TradingEconomics.com.

But keep your eye on the claimant count, which has been creeping higher for most of the past year and is on track to do so again in the final month of 2016.

The upswing isn’t threatening as long as the jobless rate remains low. But 2017 will be a pivotal year for the UK as it begins to formally separate from the EU. The rising number of newly unemployed suggests that the economic headwinds could strengthen as Britain goes down the Brexit rabbit hole.

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US: Consumer Price Index (1330 GMT): Headline inflation in year-on-year terms is set to pop up to a two-year high in December, according to TradingEconomics.com’s consensus forecast.

If the estimate is right, the case will strengthen for expecting the Federal Reserve to continue raising interest rates this year.

Meantime, the Treasury market is already expecting a firmer pricing trend. The implied inflation rate via the yield spread on the nominal 10-year note less its inflation-indexed counterpart climbed to 1.99% in mid-day trading on Tuesday – the highest since mid-2014.

Inflation appears to climbing, but it’s still not worrisome from the perspective of monetary policy, New York Fed President William Dudley said yesterday.

The economy is "not growing much above its sustainable long-term pace” and “pressures on labor resources have been increasing, but quite slowly,” he told a conference.

“Finally, the recent strengthening of the dollar will put downward pressure on import prices and limit the ability of domestic producers to raise their prices.”

Nonetheless, the tide appears to have turned. Core CPI inflation, which is considered a more reliable measure of the trend, held in the low 2% range – slightly above the Fed’s target rate – throughout last year.

Economists think that core inflation will inch up to 2.2%, close to the highest rate in several years.

A rate hike at next month’s policy meeting is still considered unlikely, but today’s CPI report will likely restate the view that the Fed's still on track to raise rates in 2017.

US: Industrial Production (1415 GMT): Is the slump in industrial activity over? Today’s update for December appears set to signal exactly that.

Econoday.com’s consensus forecast sees output rising 0.6% at 2016’s close, which translates to an implied 0.4% year-on-year advance, the first annual increase since August 2015.

Meanwhile, the manufacturing component of today’s report is on track to post its second year-on-year rise. If the estimates are correct, both metrics will be trending higher against year-earlier levels for the first time in a year and a half.

Would that be definitive proof that the downturn that’s plagued the industrial sector has ended? No, but it would certainly add another positive piece of evidence in the corner of the optimists.

Survey data for manufacturing seems to be anticipating no less. The mood among manufacturers at the end of 2016 was the most upbeat in two years, based on the ISM Manufacturing Index. New orders and output rose sharply last month, suggesting that today’s hard data for December will follow suit.

Disclosure: Originally published at Saxo Bank TradingFloor.com