Sunset Market Commentary

Markets

July US CPI inflation figures printed very close to consensus. Monthly inflation accelerated both on a headline and on a core level to 0.2% M/M. Details showed food prices rising by 0.2% M/M, energy prices flat, and services (ex. energy) rising by 0.3% M/M. The main disinflationary impact came again from used cars and trucks where prices dropped by 2.3%. Shelter costs remain sticky at 0.4% M/M. Y/Y-inflation nudged slightly lower on the top (2.9% from 3%) and on the underlying level (3.2% from 3.3%). Supercore services inflation (stripping out food, energy, goods and shelter costs) accelerated to 0.2% M/M after two months of decline (4.5% Y/Y). Today’s dull set of data strengthens Powell’s case to start cutting the policy rate at the September meeting, but doesn’t settle the debate on the magnitude of such first cut. US money markets take some chips off the table after pushing the probability of a 50 bps move to over 60% in the wake of yesterday’s benign CPI’s. The next reference is next week’s Jackson Hole Fed symposium (Thursday – Friday). Based on data published since the July 31st FOMC meeting, we don’t expect Powell to already pre-commit to one thing or the other. Early September activity and labour market data are the ones to watch in this respect. US yields today rebound up to 4 bps at the front end of the curve (2-yr). The slight underperformance against Germany (+2 bps) doesn’t really help out the dollar. EUR/USD pierced the psychologic 1.10 barrier already early today and at 1.1035 sticks with its gains. The December 2023 top at EUR/USD 1.1139 remains the next reference with the dollar unable to comeback as long as the market plays with 50 bps Fed rate cut idea. US stock markets open marginally positive (+0.2%).

Headline UK CPI fell by 0.2% M/M (vs -0.1% M/M) with the annual figure rising to 2.2% from 2% (vs 2.3% forecast). Core CPI slowed to 0.1% M/M and 3.3% Y/Y (from 3.5% Y/Y). The more benign inflation print suggests the BoE’s close call to cut its policy rate by 25 bps early August was the right one with follow-up action becoming very likely. UK Gilts outperform with the belly of the curve dropping over 6 bps. EUR/GBP spikes from 0.8540 to 0.8590.

News & Views

Swedish headline inflation rose by 0.1% M/M in July on the headline level with the Y/Y-figure stabilizing at 2.6%. Housing costs continue to be the largest contributor as well as rising fees for rented and tenant-owned appartments. The higher housing costs were partly offset by lower electricity prices. The inflation rate according to the Swedish Riksbank’s preferred CPIF (Consumer Price Index with fixed interest rate) was 1.7% Y/Y (+0.1% M/M), up from 1.3% in June. That’s below the central bank’s 1.8% forecast and suggests that they will able to put their words (two to three extra rate cuts by year-end) into action. They meet next on August 20 with money markets completely discounting a 25 bps rate cut and even contemplating the possibility of a larger (50 bps) cut. The Swedish krone didn’t respond to today’s data which were broadly in line with consensus. EUR/SEK currently changes hands just below 11.50.

The chairman of the world’s largest steel company, Baowu Steel Group, said the sector now faced a crisis more acute than the downturns of 2008 and 2015, likening the conditions to a “severe winter” and highlighting a need to preserve cash. A weakening of China’s property sector, fading hope on significant stimulus and the treat of a US recession all have their impact. YTD output lags last year’s pace at Chinese mills with key product prices collapsing. Iron ore futures fell to $95.2 a ton, the lowest level since May last year.

Graphs

EUR/USD: heading to 1.1139 resistance

EUR/GBP: benign CPI print triggers Gilt outperformance and pullback in sterling

EUR/SEK: Swedish krone unmoved by CPI data

US 2-yr yield: no additional 50 bps rate cut bets after “dull” US CPI print