All eyes on inflation data today

• China’s CPI came in at 0.5% m/m and 2.7% y/y in July, faster than the June reading – and the highest in two years - but lower than the 2.9% the market had been expecting. The increase appears to be due mainly to higher food prices rather than broad-based strong demand, with core CPI up just 0.8% y/y, slower than June. Producer inflation also slowed in July and came in lower than forecast at 4.2% y/y as raw material price growth slowed. A similar trend was evident in Japan, where PPI slowed to 0.4% m/m and 8.6% y/y in July from 9.4% y/y in June.
• Unit labour costs in the US increased by a bigger than expected 10.8% on a seasonally adjusted annualized basis in Q2, while the Q1 reading was revised slightly higher to 12.7%. Meanwhile non-farm productivity fell sharply again last quarter (-4.6%) as payrolls increased while GDP contracted. The data suggests that inflationary pressures in the US economy remain high, ahead of today’s July inflation reading.   
• Headline CPI is expected to slow to just 0.2% m/m from 1.3% m/m in June as gas and energy prices have come down over the last month.  However, core inflation is still expected to remain high, with median forecast at 0.5% m/m and 6.1% y/y. With the labour market seemingly still very strong, and wage growth still high, an upside surprise to July’s inflation readings may tilt the balance at the Fed toward another outsize rate hike at its next meeting in September.    
• Europe faced further disruption to energy supplies as crude oil flowing through Ukraine to Hungary, Slovakia and Czech Republic were stopped following the non-payment of transit fees to Russia. The situation is expected to be resolved but underlines the vulnerability of Europe given its dependence on Russia for energy. The UK is making plans to cope with possible gas shortages and extreme cold this winter, which may result in planned blackouts for both industry and households.

Today’s Key Economic Data and Events

• 10:00 GE CPI (Jul) foreast 0.8% m/m and 8.5% y/y
• 16:30 US CPI (Jul) forecast 0.2% m/m and 8.7% y/y
• 16:30 US core CPI (Jul) forecast 0.5% m/m and 6.1% y/y

Fixed Income

• US 10y yields closed 2bp higher yesterday at 2.78%, as did bunds and gilts, as the markets wait for US inflation data due today. 2s10s inverted further to nearly -50bp, levels last seen in August 2000.  

FX

• There was little change in currency markets yesterday, with the EUR gaining 0.3% against the USD and other major currencies broadly unchanged.

Equities

• US equity markets were down yesterday with the Nasdaq composite losing -1.2% and S&P500 down -0.4% on weaker earnings and guidance from semiconductor firm Micron Technology and other tech firms.  
• European indices also closed mostly lower yesterday with the exception of the FTSE 100 which eked out a 0.1% gain.
• Regional equities performed better, with the DFMGI up 1.1% and the ADXGI and Saudi Tadawul ASI up 0.2% and 0.3% respectively.  

Commodities

• Crude oil was little changed yesterday as markets waited to see if crude oil shipments from Russia to Europe via Ukraine would resume in the coming days. The Europe news was somewhat offset by API data showing that US crude stockpiles rose 2.2mn barrels last week. While the oil market is still in backwardation the Brent prompt spread has narrowed, indicating less tightness in the market for now.  

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