US CPI data paves way for Fed rate cut
The latest CPI inflation data in the US were broadly in line with expectations and so had a limited enough impact on markets, albeit they were seen as reducing the chances of the Fed cutting interest rates by 50bps at next month’s meeting, while GDP data released earlier this morning in the UK were bang in line with forecasts. All of this sees the euro trading at around $1.1010 against the dollar, having briefly risen to a high of almost $1.1050 yesterday, and at 85.6p against sterling, with the pound hovering around $1.2850 against the US currency. There’s a heavy enough schedule of US economic data today including weekly jobless claims, retail sales and industrial production, so plenty for markets to react to.
UK government bond yields fell on the back of the yesterday morning’s softer than expected inflation data, with 2- and 10-year yields down around 5bps and 7bps respectively, while equivalent US and German yields were unchanged to marginally higher. In equity markets, the S&P 500 added around 0.4%, and has more than reversed its US payrolls-related plunge at the start of last week, while European stocks closed around 0.7% higher on the day.
Yesterday’s CPI data in the US showed headline and core consumer prices both rose by 0.2% in July, as expected, with the annual rates of inflation nudging down to 2.9% and 3.2% respectively from 3% and 3.3% in June. This is the third good inflation report in a row and so would seem to copper-fasten a rate cut at the Fed’s meeting next month – the market fully expects it to lower rates by 25bps but has pared back the chances of a 50bps move to around 25%.
The UK economy has emerged strongly from a mild recession over the second half of last year. GDP rebounded by 0.7% quarter-on-quarter (q-o-q) in Q1, and rose by a further 0.6% in the second quarter according to this morning’s release driven by solid growth in the services sector (which more than offset small falls in output in both manufacturing and construction). On an annual basis, the economy grew by 0.9% in Q2, accelerating from 0.3% in the first quarter.
The Euro area economy, meanwhile, expanded for a second consecutive quarter in Q2, having stagnated through most of 2023, with GDP increasing by 0.3% q-o-q according to yesterday’s second estimate (unchanged from the first one) after a gain of 0.3% in Q1 as well. Employment in the zone also rose again in the second quarter albeit the pace of growth eased a touch to 0.2% q-o-q from 0.3% in the first quarter.
Looking to the day ahead, as noted, there are a number of economic data releases due in the US but it is quiet elsewhere with little or nothing scheduled. On the central bank front, a couple of Fed members are due to speak over the course of the day.