US inflation data in focus

The market focus today is on the US inflation data as the last key economic indicator to be released ahead of next week’s FOMC meeting. Headline inflation is expected to slow sharply to 2.5% y/y from 2.9% in July on lower energy prices. Core inflation is expected to remain unchanged at 3.2% y/y.

The UK’s unemployment rate fell to 4.1% in the three months to July from 4.2% in June, in line with forecasts. However, average weekly earnings growth slowed to 4.0% y/y (3m average to July) from 4.6% in June and was weaker than had been expected. Private sector wage growth was faster at 4.8% y/y in the three months to July, including bonuses. While the moderation in wage growth is encouraging for the UK’s inflation outlook, wage growth still remains high relative to the 2% inflation target.

China’s exports grew by a faster than expected 8.7% y/y in USD terms in August, up from 7.0% in July. Import growth slowed by much more than forecast however, rising just 0.5% y/y last month down from 7.2% y/y in July. Weak import growth was driven by a decline in oil and metal imports and provides further evidence of soft domestic demand. The data follows lower than expected inflation figures released earlier this week, raising concerns about whether the 5% GDP growth target will be met.

Egypt’s CPI inflation ticked up to 26.2% y/y in August for the first time in five months from 25.7% in July. Analysts had expected a further moderation in consumer prices last month according to a poll by Reuters published over the weekend. Prices rose 2.1% m/m on higher transport costs (11.8% m/m) after the government raised fares for public transport as well as hiking fuel prices by 10-15% in late July. Metro prices were also raised in August as were electricity tariffs. Food prices rose 1.8% m/m in the August CPI, up from 0.3% m/m in July.

Key economic data and events today

10:00 UK industrial production (Jul) forecast 0.3% m/m

16:30 US CPI (Aug) forecast 0.2% m/m and 2.5% y/y

Fixed Income

• Treasuries rallied again on Tuesday with yields declining to their lowest levels this year ahead of today’s inflation data. Comments by major wall street bank CEOs fuelled concerns about recession in the US and weak China data also weighed on sentiment. The 2y yield fell -8bp to 3.59% and is down further in Asian trade this morning, as is the 10y yield which declined -6bp to 3.64% yesterday.
• European bond yields also fell across the board on Tuesday with gilts down -3.7bp to 3.82% and bund yields down -3.9bp to 2.13%.

FX

• The US dollar index rose slightly on Tuesday as currencies largely treaded water ahead of today’s key US inflation data release. JPY gained 0.4% on Tuesday and is already 1% firmer in Asian trade this morning at 141.7/USD as of this writing. CHF and GBP rose 0.2% on Tuesday while EUR was unchanged against the dollar. Among the commodity currencies NZD gained 0.5% to 0.6162 while AUD was 0.3% firmer and CAD largely unchanged.

Equities

• The Nasdaq100 rose 0.9% on Tuesday while the S&P500 closed 0.5% higher. Financial stocks fell -1.0% after US bank executives were cautious in their outlook for the coming months. European indices lost ground yesterday with the EuroStoxx50 down -0.7% and the FTSE100 down -0.8%.
• Local equity markets rose on Tuesday with the DFMGI up 0.7% and the ADXGI rising 0.5%. The Saudi TASI closed 0.2% higher.

Commodities

• Oil demand concerns continue to weigh on prices following weak China data this week as well as the increased fears about a slowing US economy. Brent futures fell -3.7% on Tuesday to below USD70/b for the first time in more than 2 years. WTI declined -4.3% to USD 65.75/b.
• OPEC barely nudged its demand growth forecast for 2024 in its September oil market report, expecting demand growth of 2.03m b/d, slightly lower than the 2.1m b/d previously forecast. The producers’ alliance still expects demand growth of 130k b/d in the developed economies and almost 2m b/d alone from emerging markets. For 2025, OPEC also shaved its demand growth forecast to a still robust 1.74m b/d, down from 1.78m b/d previously. The forecasts stand at odds with the announced plan last week of several members to delay returning production to markets. Based on the OPEC forecast, oil market balances would be in a deficit of more than 3m b/d in H2 2024 which does not align with the dramatic sell-off in oil prices over the last several weeks.