Dollar continues to nudge higher
Friday’s Euro area and US inflation data were broadly in line with expectations and so had a limited impact on the main currency pairs. That said, the euro and sterling continued to drift lower against the dollar and are trading at around $1.1060 and $1.3130 this morning, leaving EURGBP largely unchanged at around £0.8420. This Friday’s jobs report in the US could be more consequential for markets, including FX, given the Fed’s concerns about increased downside risks to the outlook for employment, but before that there are some other important US economic releases due, including the ISM manufacturing and services reports on Tuesday and Thursday respectively and job openings on Wednesday.
Government bond yields continued to edge higher on Friday, leaving US and UK 10-year yields up around 10bps over the week as whole (at around 3.90% and 4.01% respectively) and equivalent German yields up around 8bps (to 2.30%). A late rally in US stocks saw the S&P 500 end Friday with gains of around 1% – and of just over 2% for August, despite its sharp sell-off at the start of the month – leaving it within a whisker of its all-time high in mid-July. European stocks closed slightly lower on Friday but were still ahead on the week and up almost 2% over the month.
The annual rate of headline inflation in the Euro area fell to 2.2% in August from 2.6% in July, according to Friday’s flash estimate, the lowest reading since July 2021, while core inflation (i.e. excluding energy and food) nudged down to 2.8% from 2.9%. Within core, goods inflation fell to 0.4% from 0.7%, which just about offset an increase in services inflation to 4.2% from 4%.
The still elevated rate of Euro area services inflation is a concern for the ECB, with Governing Council member Schnabel noting on Friday that, “for price stability to be restored sustainably, services inflation needs to return to a level that is consistent with underlying inflation of 2% over the medium term.” At the same time though, she said “all in all, recent data remain consistent with the baseline scenario that foresees inflation (falling) back to our 2% target by the end of 2025” – which means the ECB is very likely to lower interest rates later this month.
In the US, the annual rates of headline and core PCE inflation remained at 2.5% and 2.6% respectively in July, broadly as expected, with both headline and core prices increasing by 0.2% from June. While inflation continues run above target, Fed Chair Powell said in his Jackson Hole speech last month that “his confidence has grown that inflation is on a sustainable path back to 2 percent.”
It is a quiet enough start to the week in terms of economic data, with final manufacturing PMI readings for August due in the Euro area and UK.