Inflation in the US sets up rate cuts next month

Inflation in the US continued to fall back in July with the headline CPI index rising by 2.9% y/y, its lowest level since 2021. On a monthly basis the headline index rose by 0.2%, up from a drop of 0.1% a month earlier. Core inflation also ticked lower to 3.2% but was largely in line with market expectations. Shelter was the overwhelming contributor to inflation in July, accounting for 1.8% of the total rise in the headline index with other core services like transport and medical care also adding to inflation. Overall the CPI index was broadly on track with market expectations and likely outperformed some aspirations for an undershoot that would have raised the prospect of a deeper cut from the Federal Reserve next month. Market pricing for the September FOMC continues to pull away from a 50bps cut with about 34bps of cuts priced in following the CPI data.

Inflation in the UK accelerated in July, rising to 2.2% y/y compared with 2% a month earlier. However, the inflation estimate missed market expectations of a faster acceleration. Core inflation slowed to 3.3% from 3.5% a month earlier while services inflation dropped to 5.2% y/y, its slowest pace since June 2022. Hospitality and transport were drags on the headline CPI index while housing and utilities provided most of the monthly uptick. Producer price inflation in the UK slowed in July, easing to 0.8% y/y from 1% a month earlier, providing some hope that disinflation will remain the trend in coming months and giving the Bank of England room to consider easing its policy stance.

The Eurozone economy expanded by 0.3% q/q in Q2 2024 according to preliminary estimates. The pace matches that recorded in Q1 this year but on an annual basis the economy picked up to 0.6% y/y in Q2 compared with 0.5% y/y in Q1. Among the major economies, Germany’s economy contracted by 0.1% q/q, France recorded growth of 0.3% q/q and Italy’s economy expanded by 0.2%. Employment growth in the Eurozone slowed in Q2, however, to 0.2% q/q down from 0.3% in the prior two quarters.

Data from China’s economy continues to underwhelm with industrial production slowing down to 5.1% y/y in July, a tick lower from 5.3% recorded a month earlier. Fixed asset investment also eased to 3.6% y/y in the first seven months of the year, compared with 3.9% in the first half. Retail sales year-to-date were up 3.6% y/y as of July, down from 3.9% in the year to June. China has so far resisted from introducing substantial stimulus measures and the Third Plenum in July gave broad outlines to improve conditions for consumption in China’s economy but with no material programme.

Japan’s economy accelerated in Q2 to 0.8% q/q (or 3.1% annualized) up from a drop of 0.5% in Q1 2024. All major sectors of the economy contributed to the faster-than-expected growth with household spending up 0.5% q/q, residential investment rising by 1.4% exports growing by 2.2%.

Today’s Economic Data and Events

• 10:00 UK GPD q/q Q2p: forecast 0.6%
• 10:00 KSA CPI y/y
• 16:30 US retail sales Jul m/m: forecast 0.4%
• 16:30 US initial jobless claims Aug 10: forecast 235k
• 17:15 US industrial production Jul m/m: forecast -0.3%

Fixed Income

• Market response to the US CPI numbers was relatively staid with a near 3bps rise in the 2yr UST yield to 3.9558% while the 10yr yield closed near unchanged by the end of the session at 3.8352%. Overall the data affirmed expectations of a cooling economy but not one that was in imminent need of emergency assistance from the Fed.
• Bond markets elsewhere closed higher on Wednesday. Gilt yields fell 6bps to 3.823% while bund yields were a touch lower at 2.177%. Overall bond indexes were also positive with emerging market and high-yield bonds higher.

FX

• Currency markets had a mixed session yesterday with EURUSD closing higher by 0.2% at 1.1012 while GBPUSD slipped by 0.3% to 1.2829 as inflation data missed market expectations. USDJPY also pushed against the yen with a rise of 0.3% to 147.33.
• Commodity currencies were broadly weaker with the NZDUSD leading the way lower after the RBNZ cut rates. The Kiwi fell 1.3% to 0.5998 while AUDUSD dropped by 0.5% to 0.6598 and USDCAD edged up by about 0.1% to 1.3716.

Equities

• A lack of surprise in the CPI print helped to keep equity markets buoyant with the Dow Jones rising by 0.6% overnight while the S&P added 0.4% and the NASDAQ closed near unchanged. European markets were also higher with the FTSE up 0.6% and the EuroStoxx index adding 0.7%.
• Asian markets have opened on a strong footing in trading today with the Nikkei gaining 0.9% while Chinese markets are also stronger.

Commodities

• Oil prices drifted lower overnight with Brent futures down 1.1% at USD 79.76/b and WTI off by 1.8% to USD 76.98/b. Crude inventories reported by the EIA showed a build of 1.4m bbl last week though there were draws in both gasoline and distillate stockpiles. Production in the US dropped by 100k b/d to 13.3m b/d while product supplied added about 500k b/d to 20.52m b/d.