Inflation in the US keeps cool

Personal spending in the US rose by 0.5% m/m in July, up from 0.3% a month earlier. There was a sharp acceleration in spending on durable goods, up 1.4% m/m while services spending growth was steady at 0.4% m/m. The PCE deflator, the Fed’s preferred inflation measure, remained at 2.5% y/y for a second month running while on a monthly basis it accelerated modestly to 0.2%, up from 0.1% in June. The core PCE index remained at 0.2% m/m and 2.6% y/y. The lack of significant inflation acceleration means the Fed will be confident that it can start to cut rates later this month though the scale of move at the FOMC will be set by the release of the August labour market data at the end of the week.

Inflation in the Eurozone slowed to 2.2% year/year in August, down from 2.6% a month earlier and reaching its lowest level since July 2021. Core inflation also ticked lower at 2.8% y/y in August, down from 2.9% a month earlier. Services prices remain relatively elevated at 4.2% in August, up from 4% a month earlier and maintaining an upward trend since Q4 2023. While the headline inflation picture will give the European Central Bank confidence that they can cut rates by 25bps again at their September 12 meeting, the elevated services component will temper expectations that the ECB will cut as sharply as the Federal Reserve. Among the major economies inflation in Germany was estimated at 2% in August, France at 2.2% and Italy’s at just 1.3%.

China’s manufacturing PMI for August dropped to 49.1, down from 49.4 a month earlier. The index has been below the 50 neutral level for the last four months, pairing with softer data on industrial production and fixed-asset investment. The non-manufacturing PMI improved marginally to 50.3, up from 50.2 a month earlier. The China Caixin manufacturing PMI from the private sector improved more than expected to 50.4 in August, up from 49.8 a month earlier.

India’s economy expanded by 6.7% y/y in the three months to June, its coolest pace of expansion since Q1 2023. Government consumption shrank in Q2, down by 0.2%, while private demand accelerated to 7.4%. Fixed investment rose by 7.5% y/y while exports grew by almost 9% y/y and imports rose by 4.4% y/y.

Today’s Economic Data and Events

• 11:00 TU S&P Global/ICI manufacturing PMI Aug
• 12:00 EC HCOB manufacturing PMI Aug (f): forecast 45.6

Fixed Income

• Treasury yields were weaker at the end of the week even as data continues to point to the Federal Reserve starting to cut rates later this month. Yields on the 2yr UST rose by 2bps to 3.9165% while the 10yr yield added 4bps to 3.9034%. Market pricing based on Fed Funds futures has about 33bps of cuts priced in for September, almost midway through a 25bps and 50bps cut.
• Most benchmark bonds were weaker on Friday with bund yields higher along with French and Italian bonds dipping. In local currency markets, South African yields rose 7bps to 10.569% while Indian 10yr yields were flat at 6.864%.

FX

• The dollar rallied against most peers at the end of the week with EURUSD down 0.3% to 1.1048 while GBPUSD dropped the same amount to close the week at 1.3127. USDJPY also gave back some of the yen’s recent strength with a rise of 0.8% in the pair to leave it at 146.17.
• Commodity currencies also closed weaker with AUDUSD down almost 0.5% at 0.6765 while NZDUSD fell 0.1% to 0.6249 and USDCAD was marginally higher at 1.3492.

Equities

• Global equity markets had a mixed close at the end of the week with US markets higher while European benchmarks dropped. The Down Jones added 0.6% while the S&P rose by 1% and the NASDAQ gained even more at 1.1%.
• The EuroStoxx index fell 0.2% while the FTSE 100 was marginally lower. Asian markets were stronger with the Nikkei up 0.7% while the Hang Seng added 1.1%.

Commodities

• Oil prices sold off at the end of the week as markets responded to news reports that OPEC+ would proceed with planned output hikes for Q4. Brent futures fell 1.4% to USD 78.80/b while WTI dropped by 3% to USD 73.55/b. Over the course of the week oil prices were marginally lower even as balances have to contend with a drop in Libya’s production and still elevated geopolitical risks.