LATAM FX: Price Signal Summary – USDCLP Extends Upward Trend

Swedish flash November inflation is due at 0700GMT/0800CET tomorrow. Consensus looks for a four tenth increase in headline CPIF to 1.9% Y/Y. This would be a full percentage point above the Riksbank’s September MPR forecast. CPIF ex-energy inflation is also expected to tick up to 2.4% Y/Y (vs 2.1% prior, 2.0% Riksbank), with analysts expecting a smaller Black Friday effect on goods inflation compared to last year. A reminder that no details are provided in the flash release. 

• This acceleration in inflation is not expected to deter the Riksbank from delivering its signalled cut at the December 19 meeting. However, further upside in underlying inflation in the coming months may increase the need for a more cautious approach to rate cuts heading into 2025.
• Much of the expected increase in headline inflation is due to higher electricity prices, which were not accounted for at the time of the September MPR. There remains uncertainty around the magnitude though, with analyst forecasts submitted to BBG ranging from 1.4% Y/Y to 2.6% Y/Y.
• Note that Riksbank Executive Board members have previously signalled a willingness to look through energy-driven volatility in headline inflation, focusing more on CPIF ex-energy developments.
• Black Friday seasonality adds another source of uncertainty, while the weaker SEK could drive further accelerations in food inflation (a trend which was highlighted in the November MPR minutes).

St Louis Fed Pres Musalem's comments (speech link) are a little more hawkish than those made recently by some of his FOMC colleagues (note he is a 2025 voter), though perhaps not quite as much as the initial Bloomberg headlines suggested and not surprisingly so given his historically hawkish leanings. His comments about risks of disinflation stalling, and potentially slowing/pausing cuts, were notably not part of his core scenario - and he says he is retaining "optionality" about the December FOMC meeting decision. However he does seem to see the balance of risks as tilted toward inflation remaining stubborn, entailing slower cuts.

• On a pause/slowing of cuts: "Based on what we know today, further easing toward a neutral policy stance will likely be appropriate over time... the path toward a neutral policy stance could be accelerated, slowed or paused depending on how the economic environment and outlook evolve... it seems important to maintain policy optionality, and the time may be approaching to consider slowing the pace of interest rate reductions, or pausing... while it is not in my baseline scenario, information received since September suggests a higher risk that progress toward 2% inflation could stall, or possibly reverse... In the current environment, easing policy too much too soon poses a greater risk than easing too little, or too slowly."
• Asked in the Q&A about potential for a pause, Musalem says "I said at future meetings... might be December, might be January, might be later...for December, I'm keeping all options open" on the rate decision, waiting to see upcoming data.
• The 75bp in cuts so far "lessened but did not eliminate monetary restraint. The policy rate remains above plausible levels for the neutral policy rate, appropriately so with inflation above target and a labor market close to full employment"
• That said, on neutral rates, "monetary policy rules suggest a federal funds rate between 4.3% and 5.4% for the fourth quarter of 2024. At 4.6%, the midpoint of the current federal funds target range is already well within the range suggested by policy rules, and below the median of this range. Further reductions in the federal funds rate will therefore require careful management and depend crucially on an expectation of further convergence toward 2% inflation."
• His outlook for the economy is pretty consistent with other FOMC members: "Progress [in inflation] should become more evenly balanced, shifting from a reliance on falling goods and energy prices and toward lower housing and services inflation. I expect economic activity will moderate toward its long-term potential in level and growth terms. Some further gradual labor market cooling is likely, accompanied by moderating compensation growth."