Friday brought a few positive news to the dollar at once. Retail sales in September rose by 1.6%. This growth was the highest since March 2015, which contributed to the elimination of the effects of hurricanes and the associated increased demand for cars and building materials.
The rise in energy prices due to a decrease in gasoline output in oil refineries affected by hurricanes in the southern states has led to a peak in consumer inflation since the beginning of the year. Price growth in September was 0.5%, which is higher than the 0.4% in the previous month. Year on year inflation accelerated to 2.2% but Core CPI was stuck at the level of 1.7% for the fifth consecutive month, which apparently, is the main reason that investors are not in a hurry to buy a dollar.
The Trump administration continues to prepare public opinion for a large-scale tax reform. Speaking to the American workers, Trump again voiced all 9 points of the reform plan presented in September, whose main provisions, according to polls, support the majority of the citizens of the country. On Friday, the Minister of Finance, Mnuchin, made a speech which promised to increase the salaries of employees as a result of reforms and a fair scale of tax cuts for the rich and poor, among other things. According to Mnuchin, the record growth of the stock market reflects expectations about changes in the tax policy. That is, investors are waiting for changes with a positive attitude.
The Fed, apparently, is determined to raise the rate at a meeting in December. As for what follows from the FOMC minutes published on Wednesday, the three most gentle-minded members of the committee, Brainard, Evans, and Kashkari, are against the rate hike, since the current low inflation may be deeper than it is thought due to low inflationary expectations and weakness in the labor market . However, they are in a clear minority. The majority of the cabinet members continue to believe in the Phillips curve and are expecting an outpacing growth in the average wage, especially in September where hourly earnings grew much more than expected. In general, the predominance is clearly behind the hawks and the market estimates the likelihood of a rate hike in December as very high.
In favor of tightening monetary policy and a sharply increased consumer confidence index from the University of Michigan, the October indicator was revised to 101.1p from the preliminary level of 95.1p. Meanwhile, the revision experts did not expect it to indicate a positive mood of consumers or to add chances for inflation growth.
The forecast for GDP for the 3rd quarter as of October 13 was improved to 2.7%. The GDPNow model from the Federal Reserve Bank of Atlanta also supports bullish sentiments in the dollar.
On Tuesday, a report on industrial production will be released for the month of September. Thus, a full picture of production in the third quarter will come about. The first two months were rather weak. The data for September may somewhat improve the overall result but the situation remains unclear due to the large gap between the PMI indices from ISM and Markit. Nevertheless, the expectations are generally optimistic as PMI points to growth, which could result in a better overall GDP result.
Thus, the dollar is quite a contradictory picture. Both the Fed and the Trump Administration work in the same vein, forming a positive background for the prospects of the US economy and accordingly, strengthening the dollar's position. However, the market reacted quite nervously throughout the past week and instead of the expected growth, the dollar declined primarily because of low inflationary expectations.
Still, we can assume that the dollar will resume its growth next week. Weak inflationary expectations will go to the background because in the current situation, they are a secondary factor. Mnuchin promised that the tax plan would be on the table of Trump in December and this powerful driver of inflationary expectations will grow with time. Furthermore, the Fed's tightening of monetary policy will be compensated by the tax reform.