FOMC judged inflation to be greater risk at July meeting

Minutes from the July 29-30 FOMC meeting showed that while officials noted concerns about both the outlook for inflation and the labour market, a majority of policy markers “judged the upside risk to inflation as the greater of these two risks”. The minutes highlighted divergent views amongst policy makers on the impact of higher tariffs, with some suggesting that the impact could be a one-off price rise, while others were concerned about longer-term price pressures. While most officials appear to have agreed that it may take time for the impact of higher tariffs to be felt by consumers, there were some who highlighted that it may not “be feasible or appropriate to wait for complete clarity on the tariffs' effects on inflation before adjusting the stance of monetary policy”. Given the meeting happened before the July jobs numbers – which painted a weaker-than-expected picture of the labour market – it’s not clear that the minutes provide much further guidance on the outlook for the September meeting. Markets will instead be looking to Powell’s Jackson Hole speech tomorrow for further clues.

Consumer price inflation in the UK rose 3.8% y/y in July, above both expectations and the 3.6% rise recorded in June. Fuel prices made a significant contribution with deflation in this component slowing to -6.7% from -9.0% in June. Service inflation remains a concern, rising to 5% from 4.7% the month prior, while food prices rose to 4.9% from 4.6%.

The final print of July Eurozone inflation remained steady at 2% y/y. Core inflation was also unchanged from the pace set in June, remaining at 2.3% y/y. The marginal fall in services inflation, which declined to 3.2% from 3.3% in June, will have been welcomed by the ECB.

Today’s Economic Data and Events

• 12:00 EC composite PMI (Aug P): Forecast: 50.6
• 12:30 UK composite PMI (Aug P): Forecast: 51.6
• 16:30 US initial jobless claims (w/e Aug 16): Forecast 225k
• 17:45 US composite PMI (Aug P): Forecast: 53.5
• 18:00 US Conference Board leading index (Jul): Forecast -0.1% m/m

Fixed Income

• Early gains in short-dated US Treasuries dissipated after the release of Fed meeting minutes highlighted FOMC members’ concerns about inflation. Markets continue to look ahead to Powell’s speech tomorrow for guidance on the outlook for the September meeting. Yields on the 2yr bond were flat at 3.7478%, while the 10yr yield fell 2bps to 4.2907%.
• Moves in European bond yields were broadly lower. The 10yr Gilt fell almost 7bps to 4.67%.

FX

• The dollar was marginally weaker on Wednesday, with the spot index dropping 0.05%. EURUSD rose 0.05% to reach 1.1652, USDJPY fell 0.2% to 147.33, and USDCHF declined by 0.4% to 0.8041.
• NZDUSD fell sharply, dropping 1.2% to reach 0.5823 after the Reserve Bank cut rates and signaled the possibility of more to come.
• In emerging markets, USDTRY gained 0.1% to reach 40.9307, USDINR rose 0.1% to 87.0775, and USDEGP gained 0.3% to 48.6135.

Equities

• US equity markets struggled for a second day, with technology and consumer-discretionary stocks declining. The S&P 500 declined by 0.2%, the NASDAQ fell 0.7% and the Dow Jones gained 0.04%.
• European equity markets saw broad declines on Wednesday. The EuroStoxx 50 fell 0.2%, the CAC 40 declined by 0.1%, and the DAX dropped 0.6%. The FTSE 100, in contrast had a strong day, gaining 1.1%.
• In the UAE, the DFM fell 0.5% while the ADX was 0.1% lower. The Tadawul fell 0.03%.

Commodities

• Brent futures rose by 1.6% to USD 66.84/b while WTI gained 1.4% to USD 63.21/b. The EIA showed a 6-million-barrel fall in US crude inventories last week.
• Gold prices rose by just under 1% to USD 3,348.43/troy oz.