Mixed Signals in Economic Data: Inflation Expectations and Labor Market Strength

The U. of Michigan data released on Wednesday showed that inflation expectations in the US remained sticky in November, blurring the benign outlook that has been adopted by the market after the dovish November CPI report. US household inflation expectations accelerated to 4.5% in November, beating the estimate of 4.4% advancing by 0.3% compared to October. Inflation expectations for the 3 years ahead aligned with forecasts, coming in at 3.2%. The US Dollar was offered some support by initial claims data, as the latest reading was somewhat below estimates, indicating that the labor market retains some strength, hence possessing the potential to generate inflation pressures further. Initial claims for the week dropped by 24K to 209K. The change was quite unanticipated, as analysts predicted 229K. Interestingly enough, continuing claims ticked lower, marking one of the rare weekly declines in the almost uninterrupted rise since mid-September. Falling initial claims mean the rate of layoffs in the economy slows down, while the fall in continuing claims signifies improved prospects for the unemployed to find a job. Both indicators serve as useful gauges of labor market strength and can shed light on what to expect from the upcoming official unemployment report (NFP).On Wednesday, we saw the pullback of EURUSD to 1.0850 following the data releases (inflation expectations and initial claims); however, subsequent price action showed that markets are trying to adhere to the prospect of a breakout of the 1.10 level, as the price returned above 1.09 and continued to consolidate in the 1.09-1.10 range on Thursday. Since US markets are closed today due to the celebration of Thanksgiving, lower trading volumes reduce the chances for the immediate continuation of the upside EURUSD trend.Meanwhile, GBPUSD persists in its bullish run, gaining almost half a percent on Thursday. As in the case with EURUSD, there was a bearish retracement on Thursday, but the pair found support at the upper bound of the bullish channel, which guided price movement before the US CPI release. The outlook for the Pound remains bullish as well, with the 1.26 level as the key target for buyers. Still, the fact that the price moved away from its key moving averages (50, 100, 200-day MAs) calls for caution, as a mean-reverting signal could occur near the next round level. The economic calendar on Thursday featured the release of PMI reports in the services and manufacturing sectors for key EU economies. Overall, the data was mixed, with Germany's PMIs coming in slightly above estimates, while France's numbers were a little lackluster. For the Eurozone, the numbers were slightly above anticipated levels, helping European currencies cement their ground against the dollar. Lower oil prices are also helping the currencies of energy-importing countries via the inflation expectations channel. OPEC's decision yesterday to delay discussion on production quotas intensified oversupply fears, which drove key crude benchmarks lower by an average of $3/bbl. Prices managed to recover some ground later but still trade below the level where prices were when the news hit the ground. As EU, UK, and Asian economic data still don’t show any noticeable signs of deterioration, any fall in crude oil prices due to supply fears should be viewed as a bullish factor for them.