Fuelled by higher housing costs, US inflation rose higher than expected in December, testing markets' optimism as they anticipate the Federal Reserve will cut interest rates this year
The Consumer Price Index rose 0.3 per cent last month after a 0.1 per cent gain in November, the Labour Department reported on Tuesday.
Inflation rose 3.4 per cent on an annual basis, up from 3.1 per cent in November. Economists polled by FactSet forecast inflation would rise 3.2 per cent year-on-year.
Core CPI – which excludes food and energy – had the same monthly increase as in November, of 0.3 per cent.
On an annual basis, core CPI rose 3.9 per cent, slightly higher than FactSet's 3.8 per cent projection but lower than November's 4 per cent reading.
Shelter contributed to half of the monthly all-items increase, the Labour Department reported.
Thursday's report – the first US inflation reading this year – comes as traders forecast when the Federal Reserve will cut interest rates this year, and by how much.
Ahead of the report, data from the CME Group showed most forecast the Fed to announce its first rate cut of this policy cycle in March.
Most expected interest rates to fall somewhere between 3.75 per cent and 4.25 per cent by the end of this year.
“I think March is probably too early … for a rate decline because I think we need to see some more evidence,” Federal Reserve Bank of Cleveland President Loretta Mester told Bloomberg TV.
Ms Mester, who will vote on the Fed's policy decisions this year, said that Thursday's report “shows there's more work to do” to bring inflation under control.
The Fed has raised interest rates 11 times in a row in its tightening cycle to the current rate of 5.4 per cent, hoping higher borrowing costs would cool demand.
Wall Street's major indexes soared when the Fed indicated at the end of last year that it would move from raising interest rates to cutting them.
But that momentum failed to carry into this year.
The US stock market was little changed when trading closed on Thursday.
The Dow Jones Industrial Average gained 0.04 per cent while the Nasdaq Composite rose by a near-zero percentage point. The S&P 500 also changed little, sliding by 0.07 per cent.
The US central bank's turnaround in December came as inflation declined significantly without a sharp rise in unemployment.
Markets' optimism on rate cuts stands in contrast to the Fed's own projections, however. The central bank's most recent estimations forecast three rate cuts this year.
And minutes released from a December 12-13 meeting showed officials are uncertain on when they might begin cutting rates.
The minutes also showed the Fed still believes rates will be elevated “for some time” until the central bank sees clear evidence it is moving down towards its long-term 2 per cent goal.
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Terror attacks in Paris, November 13, 2015
- At 9.16pm, three suicide attackers killed one person outside the Atade de France during a foootball match between France and Germany
- At 9.25pm, three attackers opened fire on restaurants and cafes over 20 minutes, killing 39 people
- Shortly after 9.40pm, three other attackers launched a three-hour raid on the Bataclan, in which 1,500 people had gathered to watch a rock concert. In total, 90 people were killed
- Salah Abdeslam, the only survivor of the terrorists, did not directly participate in the attacks, thought to be due to a technical glitch in his suicide vest
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Emirates launched a new daily service to Mexico City this week, flying via Barcelona from Dh3,995.
Emirati citizens are among 67 nationalities who do not require a visa to Mexico. Entry is granted on arrival for stays of up to 180 days.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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