US inflation in line with forecasts in July

US inflation came in largely in line with expectations. Both headline and core inflation rose by a modest 0.2% m/m, which if annualized is not far off the Fed’s 2% target. On an annual basis, headline CPI rose to 3.2% y/y in July from 3.0% in June while core inflation moderated fractionally to 4.7% y/y from 4.8% y/y in June. Housing rose 0.4% m/m and 7.7% y/y in July, but is expected to ease going forward as it lags market developments. Transport services inflation also accelerated last month to 9.0% y/y, despite lower airfares. Overall, the data appears to be good enough for the Fed to keep rates on hold in September.  Mary Daly, president of the San Francisco Fed, said the data was good but that there was “still more work to do”.

Egypt’s headline CPI inflation accelerated to 39.8% y/y in July, a new record high for the annual measure after the 35.8% rise in June. Food and non-alcoholic beverages, the largest component of the basket, drove the price gains as it rose 69.7% y/y, while utilities, the second-largest weighting, was up 10.3%. Tourism-related businesses are also recording strong price growth as the country hosted a record high of over 7mn visitors in H1 – hotels, cafes & restaurants recorded annual price growth of 47.7%. On a monthly basis, headline inflation was at 4.4% as the annual measure of education costs came in at 11.6% m/m. The Central Bank of Egypt hiked its benchmark interest rates by 100bps last week to new highs, and we expect one more 100bps move higher in this cycle with inflationary stresses still stark.

Today’s key economic data and events

• 10:00 UK GDP (Q2) forecast 0.0% q/q and 0.2% y/y
• 10:00 UK industrial production (Jun) forecast 0.2% m/m and –1.1% y/y
• 16:30 US PPI (Jul) forecast 0.2% m/m and 0.7% y/y
• 18:00 University of Michigan consumer sentiment (Aug) forecast 71.3

Fixed Income

• US Treasuries reacted more to a soft auction for 30yr UST than they did to the July CPI which came in broadly in line with expectations. Yields on the 2yr UST rose 3bps to 4.8417% while the 10yr added almost 10bps to 4.1055%, adding more bear steepening pressure to the curve. The 2s10s spread steepened by 6bps to -74bps overnight. Markets have entirely priced out any additional rate hikes for the remainder of 2023 with the first cut priced in for end of Q1 next year.
• European bond markets closed the day mixed overnight with bund yields up by 3bps to 2.523% while the 10yr gilt yield was flat at 4.358%. Turkey 10yr eurobonds have picked up with yields down 4bps to 8.086% as markets look to positive news from rating agencies on a potential upgrade.
• Moody’s said Egypt’s sovereign rating remains on watch negative, noting that the draw in “external liquidity” could exceed the potential revenue raising from asset sales and privatization.   

FX

• Currency markets faded gains posted immediately after the release of US CPI with EURUSD closing near flat at 1.0981 while GBPUSD lost 0.3% to 1.2676, its third day in a row of losses. USDJPY also pushed higher to 144.75, up 0.7%.
• Commodity currencies fared little better with USDCAD up 0.2% to 1.3449 while AUDUSD fell 0.2% to 0.6515 and NZDUSD dropped 0.5% to 0.6021.

Equities

• There was little strong movement in either direction in US equity markets yesterday after the CPI print came in broadly in line with expectations. The S&P 500 closed flat while the NASDAQ added 0.1% and the Dow Jones gained 0.2%.
• Some gains earlier in the session in Europe were pared through the rest of the day, though luxury and travel firms received a boost from new around loosening restrictions on Chinese tour travel. France’s CAC was the notable gainer as it closed up 1.5%, while the DAX lagged with a 0.9% rise.
• Locally, the DFM and the ADX both closed down 0.5%. In Saudi Arabia, the Tadawul ended the day 1.2% higher.

Commodities

• Oil prices turned lower overnight with Brent futures down 1.3% to USD 86.40/b after pipping near USD 88/b midway through the day. WTI fell by 1.9% to USD 82.82/b. OPEC estimates a deficit of about 2m b/d in Q3 as Saudi Arabia maintains its oil production cuts, which if it materializes should help to put a solid floor under prices.