• Today was one stretched countdown to the US inflation numbers without a lot of market fireworks in the run-up to it. Prices at the other side of the Atlantic generally came in slightly below expectations. Both headline and core inflation rose 0.2% m/m, missing a 0.3% analyst estimate. Yearly price pressures eased from 4% to 3% in the headline gauge and from 5.3% to 4.8% in the core. The bar was set at 3.1% and 5% respectively. It’s the slowest pace in about two years. Base effects had their maximum downward impact as CPI in June last year hit its four-decade high on a 1.2% m/m surge. Core inflation back then also shot up an unusual 0.6% m/m but only hit its peak in September 2022, also on a 0.6% m/m pace. This means we still might see some strong statistical downward pressure in the core number later this year. Specifically this month, though, used cars (-0.5% m/m) and airline fares (-8.1%) weighed the figure down. Shelter prices rose a solid 0.4%, explaining about 70% of the monthly June increase. Energy prices picked up again (0.6%) after declining in May, led by gasoline and electricity. Goods inflation fell 0.1% m/m but service inflation still rose 0.3%. For Richmond Fed president Barkin today’s inflation is still too high. He warned for backing off too soon and added that he is comfortable to do more if inflation doesn’t get to the 2% goal. Barkin, however, does not vote on monetary policy this year.
• US rates and the dollar since the payrolls last Friday corrected lower, even as economic data earlier last week surprised to the upside. It tells you something about the market’s mindset going into today’s CPI release. The reaction as such was textbook. Core bonds jumped with US Treasuries outperforming vs Bunds. Yields at the 2-5 year bucket drop 10.7-11.6 bps. The 2 year yield eases further south of the symbolic 5% barrier. Longer maturities including 10 and 30 year slip 5.9 and 0.3 bps respectively with the former testing support at the 3.90-3.92% zone. German yields follow US peers by shedding 1-5.9 bps with the front end outperforming. First important support zones are not (yet?) being tested though (3.17% for the 2 y yield, 2.57% for the 10 y yield). Equities cheered at the data, presuming it relieves the Fed somewhat. The EuroStoxx50 extends gains to 1.4%, Wall Street opens with gains between 0.7-1.2%. Oil turns positive for the day with a barrel of Brent touching $80 for the first time since May. The dollar slid. EUR/USD jumped to the highest level since early May. At 1.1084 the pair is ever closer towards the YtD high of 1.1095. It even came to a test. DXY (100.95) in a mirror move dropped towards the YtD lows of 100.78. The yen takes advantage and pushes through to USD/JPY 139.24.
News & Views
• The Bank of England published its bi-annual Financial Stability Review. The UK economy has so far been resilient to interest rate risk, though it will take time for the full impact of higher interest rates to come through. More households are being affected by higher interest rates as fixed-rate mortgage deals expire. The proportion of households with high debt service ratios, after accounting for the higher cost of living, has increased and is expected to continue to do so through 2023. The corporate sector is expected to remain broadly resilient to higher interest rates and weak growth. The UK banking system is well capitalized and maintains large liquidity buffers. Asset quality overall remains relatively strong, with higher interest rates having had a limited impact on credit risk so far.
• Reserve Bank of Australia governor Lowe this morning announced that the rate-setting board will move to 8 meetings a year from 11 now beginning in 2024. The former is the pace followed by most major central banks: “The less frequent and longer meetings will provide more time for the board to examine issues in detail and to have deeper discussions on monetary policy strategy, alternative policy options and risks, as well as on communication.” The RBA meets next on August 1 and conduct a full review of its central forecasts and risks. Lowe, who’s term ends mid-September but could still be reappointed, said that consumption growth is weak largely because of what is going on with monetary policy. The RBA is confident that they’re doing is working. The question is how much more they need to do and the RBA has a completely open mind on that. Australian money markets discount a policy rate peak around 4.5% from 4.1% currently. The Aussie dollar gains today against an overall weak US dollar with AUD/USD (0.6735), taking out short term resistance around 0.67.