Market Insight: Week Ending 18 August

Friday welcomed the latest PPI inflation numbers, revealing a higher-than-expected increase in both YoY and MoM values for July. This reversed a year-long easing of wholesale prices. YoY PPI headline inflation increased by 0.8%, up from June’s upwardly revised 0.2% and came in a touch higher than the median estimate of 0.7%. From June to July, headline PPI prices rose 0.3%, up from 0.0% and just above the 0.2% expected.

This marks the highest one-month increase since the beginning of this year. According to the BLS, the broad-based advance was largely driven by a lift in services, rising to 0.5% and denoting its fastest rebound in nearly a year. Interestingly, the increase in PPI (and headline CPI) inflation diverged somewhat from the UoM’s (University of Michigan) consumer inflation expectations release on Friday, which fell in August to 3.3%, down from 3.4% in July.

Overall, despite CPI data coming in largely aligned with market expectations, major US equity indexes ended the week on the back foot, and the buck traded higher. US Treasuries also marched higher across the curve last week, with the benchmark 10-year yield rising to a high of 4.178%. Current data, however, appears to have bought the Fed more time regarding policy as markets embrace the soft-landing narrative. Though, let’s not forget that we have one more inflation print to look forward to on 13 September (a week ahead of the Fed’s rate decision) and another employment release on 1 September.

Elsewhere, last week watched China’s economy fall into deflationary territory as consumer prices declined for the first time since early 2021. In the twelve months to July, the Consumer Price Index (CPI) fell 0.3 percentage points to -0.3% (vs. expected -0.4% [down from 0.0% previous]). According to the Producer Price Index (PPI), factory gate prices dropped -4.4% in the twelve months to July (vs. -4.1% expected [down from -5.4%]). Both the year-on-year CPI and PPI measures, therefore, are now in a deflationary state.

Over in the UK, preliminary growth data out of the UK for Q2 was released from the Office for National Statistics (ONS), revealing that the UK economy grew by 0.2% between April and June compared to the prior year. This marks a slightly stronger-than-expected print; economists polled ahead of the event anticipated the UK economy to show no change. The latest QoQ data follows 0.1% growth in Q1 of 2023 and Q4 of 2022.

This Week…

Moving forward, the key events in the US for the week ahead consist of retail sales for July and the Empire State manufacturing index for August. Softer-than-expected data here could help reinforce the soft-landing story. The FOMC minutes subsequently take centre stage on Wednesday, which, if it shows Fed officials leaning towards a pause in September/November, could weigh on the dollar and lend support to equities and bonds. The implied rate path for the next rate decision on 20 September currently reveals a 90% chance that the Fed will hold the current target range at 5.25%-5.50%.

Across the pond, UK inflation data for July will be on the watchlists for many this week on Wednesday. Market consensus heading into the event shows consumer prices on a YoY basis may cool to 7.4%, down from 7.9% in June, while core inflation for the same period is expected to be more stubborn at 6.8%. MoM, for both headline and core, economists are expecting data to remain unchanged from June to July, increasing by 0.1% and 0.2%, respectively.

Markets currently price in a 70% chance that the Bank of England (BoE) will increase the Official Bank Rate by another 25bps at the next meeting on 21 September, with a projected terminal rate of 5.75% in March 2024. Soft inflation data this week could see rate forecasts fall and subsequently weigh on the British pound, and vice versa for any upside surprise in data. The Technical Research Team released a piece on the GBP/USD’s technical position below. Additional UK data to be conscious of this week is UK employment and wage numbers (June) on Tuesday, as well as UK retail sales data for July on Friday.

Elsewhere, the latest Reserve Bank of Australia (RBA) meeting minutes is being released on Tuesday, alongside the Aussie wage price index QoQ. In addition, the Reserve Bank of New Zealand (RBNZ) are in the spotlight on Wednesday; there is a broad consensus among economists that the central bank is done tightening. Thus, I am not anticipating much from this event.

G10 FX (5-Day Change)