Delta variant weighs on US inflation and China retail sales

• US inflation slowed by more than forecast in August as the re-opening price pressures over the last few months have moderated.  Headline CPI rose by 0.3% m/m and 5.3% y/y (0.5% m/m and 5.4% y/y in July) while core CPI slowed to 4.0% y/y from 4.3% in July.  The spread of the Delta variant of the coronavirus undoubtedly contributed to some of the easing in price pressures. Airfares, hotel costs, rental car and used car prices all fell in August as fewer people travelled and dined out.  However this was offset by higher energy prices as Hurricane Ida disrupted oil and gas production. Continued supply chain disruptions and shortages did lead to higher prices for many consumer products including new cars, home appliances and electronics.  Overall, the August inflation data supports our view that the Federal Reserve will likely wait until at least November before deciding to taper asset purchases. 
• UK unemployment fell to 4.6% in the three months to July as 183k jobs were added.  Data based on the PAYE tax system suggests the growth in employment accelerated in August, ahead of the furlough scheme coming to an end earlier this month. Nevertheless, vacancies have surged to over 1mn in the three months to August, well above pre-pandemic levels.  The apparent mismatch between the jobs available and those who are still unemployed or furloughed could fuel wage inflation, which moderated slightly to 6.8% in the three months to July.
• Retail sales in China slowed sharply in August, up just 2.5% y/y compared with 8.5% growth in July and well below the market forecast of 7.0%. Industrial production also came in below consensus estimates at 5.3% y/y in August. The economic slowdown last month was likely due to tighter restrictions on movement imposed by the government to curb the spread of the Delta variant of the coronavirus.  A new outbreak was identified in the eastern province of Fujian late last week.
• UAE private sector credit growth declined -2.1% y/y in July, while lending to public sector enterprises grew 3.0%. Gross lending by banks was flat m/m and down -1.8% y/y, while bank deposits grew 0.3% m/m and 1.5% y/y. The main driver of bank deposit growth in July was government deposits which rose 3.5% m/m.
• UAE non-oil exports grew 10% in 2020 to AED 254.6bn.  However, the value of re-exports and imports declined -20% and -14% respectively, reflecting weaker global demand last year due to the coronavirus pandemic. The total value of non-oil trade for the UAE was AED 1.4tn.  As trade volumes have rebounded sharply this year, and commodity prices have increased, we expect a recovery in the value of the UAE’s non-oil trade this year.

Today’s key economic data and events

• 10:00 UK CPI (Aug) forecast 0.5% m/m and 2.9% y/y prev. 0.0% m/m and 2.0% y/y
• 16:30 US Empire Manufacturing Index (Sep) forecast 18.0 prev. 18.3
• 17:15 US Industrial Production (Aug) forecast 0.5% m/m prev. 0.9% m/m

Fixed Income

• The US Treasury curve bull flattened considerably as the August CPI print came in slower than expected. Headline price growth rose by just 0.3% m/m compared with expectations for a 0.4% rise while core inflation gained just 0.1%. The dip in prices seems to give credence to the Federal Reserve’s argument that recent price gains have been transitory and related to “reopening sectors” such as used cars and air travel.
• The 2yr UST yields fell less than 1bps to 0.207% while the 10yr gave up more than 4bps to settle at 1.2836%, pushing the 2s10s curve down to 108bps. We don’t think the soft inflation print for August will change the timeline for an announcement on tapering of asset purchases—which we expect at the November FOMC rather than next week’s meeting—provided that upcoming labour market data isn’t a disaster.
• Emerging market bonds were little changed overnight with Turkish 10yr local yields the biggest mover, falling by 4bps to 16.5%. Should we continue to see moderation in US inflation then the Fed will likely be able to take a more gradual pace in pulling back on QE, helping to support emerging market assets avoid a calamitous sell-off.

FX

• Even as the slower than expected CPI numbers may push out the pace of the Fed’s tapering of asset purchases, it did little to lift FX against the dollar. Currency markets showed initial gains against the dollar post-CPI but then largely faded the moves. EURUSD settled down marginally at 1.1803 but is tentatively edging higher in early trade today while GBPUSD was off by 0.2% to 1.3810. USDJPY was the biggest mover, dropping 0.27% in favour of the yen to 109.69.
• Commodity currencies showed the biggest moves with AUD falling 0.66% to 0.732 as the governor of the RBA pushed back on early rate hike expectations. USDCAD added 0.36% to 1.2694 while NZD fell 0.3% to 0.7098.

Equities

• Growth concerns weighed on equity markets yesterday, with all three major US indices selling off. The Dow Jones was the biggest loser, dropping -0.8% on the day, while the NASDAQ (-0.5%) and the S&P 500 (-0.6%) also declined. In Europe the DAX and Italy’s FTSE MIB managed to secure gains, of 0.1% and 0.4% respectively, but the CAC (-0.4%) and the FTSE 100 (-0.5%) both closed lower. The composite STOXX 600 closed up marginally, adding 0.05%.
• Asian markets managed to eke out modest gains, with the Nikkei gaining 0.2% and the Shanghai Composite 0.3%, but they are following Wall Street into the red in early morning trading so far today.
• There were also losses within the region yesterday, albeit more muted than in the US and Europe. The ADX closed almost flat down -0.04%, the DFM lost -0.3% and the Tadawul -0.1%. Egypt’s EGX 30 added 0.4%.

Commodities

• Oil prices remain near term supported by the effects of hurricanes in the US with a new storm, Nicholas disrupting supplies in Texas. However, gains were moderate by the standard of recent days. Brent futures rose just 0.12% to USD 73.60/b while WTI was barely higher to USD 70.46/b.
• The API reported a drop in crude inventories of more than 5.4m bbl last week along with decent draws across gasoline and diesel. We would expect to see sustained stockdraws over the coming weeks as the market recalibrates after the impacts of Hurricanes Ida and Nicholas.
• The IEA revised its outlook for oil demand growth in 2021 down slightly thanks to the impact of softer consumption in Q3 thanks to the spread of the Delta variant of Covid-19 and consequent restrictions on activity in many emerging economies. For 2022, the agency kept its forecasts largely unchanged with a small increase in demand growth (just 85k b/d) to 3.2m b/d.

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