US inflation slightly firmer than expected
Slightly firmer than expected US inflation data and a move higher in oil prices (subsequently reversed) contributed to a slight hardening of central bank rate hike expectations, an increase in bond yields, and a modest strengthening of the dollar. The euro is trading at around $1.1650 against the US currency this morning, while sterling has dipped below the $1.36 level for the first time in just over a week. EURGBP continues to nudge higher, currently trading at around £0.8575. Attention is turning to Fed Chair Warsh’s appearance at the Jackson Hole economics conference tomorrow, so the ‘price action’ in markets may be limited enough ahead of his remarks.
US government bond yields came off their highs as stocks sold off into the New York close, increasing by 2-3bps on the day, while German and UK yields rose by 4-5bps across the curve. US stocks finished flat to marginally lower, while European indices ended the day’s session largely unchanged. Nvidia’s results, published after the close of US business, came in ahead of expectations, which should boost sentiment in equity markets at the start of play today.
The annual rate of headline PCE inflation – the Fed’s target measure of inflation – came in a touch higher than expected in July at 3.7%, unchanged from June, on the back of a slightly larger than forecast month-on-month increase in prices of 0.2%. Core inflation, which excludes energy and food prices, was also unchanged in July at 3.3%, with core prices up 0.2% on the month. Core services inflation was marginally lower last month at just under 3.7%, but this was not enough to offset a pick-up in core goods inflation, which rose to 2.3% from 2.1% in June. Fed rate hike expectations firmed slightly following the data with the market now fully pricing in a 25bps increase in the policy rate by the end of this year.
For the day ahead, economic data due include money supply/credit growth for July in the Euro and the trade balance (July) and weekly jobless claims in the US. The ECB publishes the minutes of its July monetary policy meeting, at which interest rates were left unchanged.