US CPI inflation slows in June

US CPI inflation slowed to 3.0% y/y in June, down from 4.0% in May and just lower than the consensus prediction of 3.1%, while prices were up 0.2% m/m. This marked the slowest pace of annual price growth since March 2021, but the Fed is still likely to press ahead with a resumption in hiking at its upcoming July meeting given that much of the slowdown has come from more favourable energy prices compared with the spike seen last year following the Russian invasion of Ukraine. This paves the way for further declines in headline inflation over the rest of 2023, but other components of the basket have been somewhat stickier: core inflation was at 4.8% y/y in June, which was lower than the predicted 5%, but is still indicative of residual price pressures and the Fed will be wary of taking its hand off the tiller too early. Richmond Fed president Thomas Barkin said words to that effect at an event on Wednesday, telling attendees that ‘If you back off too soon, inflation comes back strong, which requires the Fed to do even more.’

India’s CPI inflation was at 4.8% y/y in June, up from 4.3% in May and higher than the predicted 4.6%. Food & beverage prices and housing prices both rose 4.6%, while fuel & lightning prices were up 3.9%. The acceleration in June was the first uptick in inflation in four months, and given challenges in the headlines around tomatoes and potential inflationary pressures through the remainder of the year, the RBI will likely remain on hold for the time being. Meanwhile, industrial production in India exceeded expectations in May as it expanded 5.2% m/m, compared with predictions of a 5.0% gain. This was an acceleration from the upwardly revised 4.5% seen in April.

The Bank of Canada hiked its benchmark overnight interest rate by 25bps yesterday, taking it to 5.00%. The decision was in line with expectations as the central bank and the communique cited concerns around ‘persistent inflationary pressures in services’ stemming from ‘robust demand and tight labour markets.’ The bank expects that the decline in inflation will decelerate as the large price rises of last year pass through the base, and project a return to the target 2% not until the middle of 2025.

Pakistan has secured a USD 3bn deal from the IMF after a prolonged period of negotiations. The nine-month standby agreement will see USD 1.2bn disbursed immediately, which will help the country start putting its economy back on an even keel. The IMF programme has called for greater fiscal discipline and energy policy reforms.

Today’s Economic Data and Events

• 10:00 UK industrial production, % m/m, May. Forecast: -0.4%
• 16:30 US initial jobless claims, week to July 8. Forecast: 250,000

Fixed Income

• Yields on US Treasuries fell on the back of Wednesday’s CPI print for June, which saw headline inflation moderate to 3% y/y. Yields on the 2yr UST closed lower by almost 13bps at 4.746% while 10yr yields declined by 11bps to 3.857%.
• Declines were also seen in UK Gilt yields, with the 2yr yield falling 19bps to 5.205% and the 10yr yield declining 15bps to reach 4.507%.
• There were also widespread declines in yields on benchmark European bonds, with 2yr bund yields down by 9bp to 3.199%.

FX

• The dollar extended its losses again overnight on news of slowing inflation, with the broad DXY index falling 1.19% against peers. EURUSD gained strongly, up 1.1% to 1.1129. GBPUSD also rallied, up 0.4%, to reach 1.2988. There were further losses for the dollar against JPY which fell by 1.33% to 138.5.
• Commodity currencies closed strongly. USDCAD fell for a second day, declining 0.3% to 1.3187 after the Bank of Canada raised rates by 25% yesterday. AUDUSD continued to rally, up by 1.5% to 0.6787 while NZDUSD rose by 1.6% to 0.6297.

Equities

• US equity markets reacted positively to the softer inflation print yesterday, with all three major benchmark indices closing higher. The Dow Jones, the S&P 500, and the NASDAQ added 0.3%, 0.7%, and 1.2% respectively.
• There were similarly strong gains in Europe as the composite STOXX 600 closed up 1.5%. The UK’s FTSE 100 added 1.8%.
• Locally, the DFM closed up marginally (0.04%) while the ADX added 0.3%. In Saudi Arabia the Tadawul closed 0.5% higher.

Commodities

• Both benchmarks saw further robust gains yesterday, as Brent futures added 0.9% to close back up over the 80 mark for the first time since April at USD 80.1/b, while WTI added 1.2% to USD 75.7/b.
• Prices were boosted along with other risk assets as US inflation came in marginally softer than expected, with the weakening dollar also providing support. Reports from both OPEC and the IEA are expected later today.