US bond yields lower on soft inflation data
Another benign set of US inflation data – this time producer prices – contributed to a further paring back of Fed rate hike expectations – the market is no longer quite fully pricing in a 25bps increase in the policy rate by the end of this year – and a fall in US bond yields. Despite this though, the dollar was largely unmoved, remaining in a relatively tight range. Hence EURUSD and GBPUSD are trading at around $1.1545 and just north of $1.35 respectively this morning, little enough changed from yesterday morning’s levels. Similarly for EURGBP, which continues to hover around the £0.8550 mark.
US government bond yields fell by 4-6bps across the curve, with the largest decline occurring at the short-end reflecting the easing of rate hike expectations, while German and UK yields ended marginally lower on the day. In equity markets, US stocks had a positive session, with the S&P 500 gaining around 0.7% to close at a new record high, but European indices finished flat to a touch lower.
US producer output prices were unchanged on the month in July – an increase of 0.2% was expected – and the annual rate of increase eased for a second month running, to 4.7% from 5.5% in June and a (most recent) peak of 5.9% in May. Producer prices excluding energy and food rose by 0.2% last month – again a touch softer than expected – and the y-o-y pace of increase slowed to 4.2% from 4.7% in June.
Fed member Hammack – one of three who dissented in favour of a 25bps increase in interest rates at the July monetary policy meeting – says she “loves to see that those (inflation) numbers are coming in lower,” but she doesn’t “have confidence that we’re going to continue to see that, or that we’re going to see them low enough that it’s going to bring us back down to that 2% (inflation) target.” Hence she has been calling for “a higher federal funds rate (to) help restrain economic activity and reduce inflationary pressures”
It is quite a busy end to the week in terms of economic data. Retail sales (July) and consumer confidence / inflation expectations (August) are due in the US, while a second estimate of Q2 GDP growth (the first estimate showed the economy grew by 0.4% q-o-q) and a preliminary estimate of Q2 employment growth are scheduled in the Euro area.