Markets:
July US Consumer Price Inflation took center stage today. The headline index rose by 0.5% M/M to stabilize at 5.4% Y/Y (13-yr high). It’s the third month in a row with a 5%+ inflation print. Food and energy increased by 0.7% M/M and 1.6% M/M respectively, to be up 3.4% Y/Y and 23.8% Y/Y. Underlying core CPI rose by 0.3% M/M and 4.3% Y/Y. The shelter index rose 0.4% in July and accounted for over half of the monthly core increase. New vehicle prices rose by 1.7% M/M (6.4% Y/Y), but there was a moderation in used cars and trucks’ prices (+0.2% M/M; +41.7% Y/Y)). This followed on three consecutive months of 7%-10% monthly price rises. The index for motor vehicle insurance was one of the few major component indexes to decline in July, falling 2.8% after rising in each of the last 6 months. The index for airline fares fell slightly in July, declining 0.1% after rising sharply in recent months.
Enough for the numbers. Over to financial markets. High July inflation readings were near consensus and in first instance triggered some profit taking on the USD rally of the past week and some short covering in the US Treasury market. We add that moves didn’t went that far though. Inflation remains uncomfortably high, stretching the meaning of the word “temporary” and the patience of (US) central bankers. EUR/USD was flirting with the 1.1704 YTD low until the CPI print pushed the pair to an intraday high around 1.1750. The pair is currently changing hands around 1.1725. The trade-weighted dollar tested the July top of 93.19 ahead of the release. We don’t consider the test of the key 1.17 area as over. Pressure will persist in the run-up to the August 26-28 Jackson Hole symposium which could be the theatre for the Fed to pre-announce winding down of net asset purchases. The US Note future ticked slightly higher as well, but moves are extremely muted with tonight’s 10-yr Note sale in mind. The same reasoning goes for US Treasuries, where we also see additional downside. The US yield curve bull steepens currently with yields sliding by 1 bp (2-yr) to 0.1 bp (30-yr). German Bunds marginally underperform today with the curve slightly bear steepening. German yields add up to 0.5 bps (30-yr). News on the European side of the story remains extremely thin. Tomorrow, we get (outdated) industrial production numbers with the next interesting release only scheduled for next week with the EMU Q2 GDP print.
EUR/GBP treads water near key 0.8470 support today. Tomorrow’s Q2 UK GDP release has the potential to break the deadlock though a (big) consensus beat will probably be necessary to trigger a sustained break lower as last week’s post-BoE sterling rally is running out of steam.
News Headlines:
US National Security Adviser Jake Sullivan wants OPEC+ to more rapidly return oil to the market. Current plans to boost output aren’t sufficient. “We are engaging with relevant OPEC+ members on the importance of competitive measures in setting prices. Competitive energy markets will ensure reliable and stable energy supplies, and OPEC+ must do more to support the recovery”. Brent crude prices fell from around $71/barrel to $69 after the publication of the statement.
Minutes of the July 27 Hungarian central bank meeting revealed an unanimous decision to raise benchmark rates a second straight month by 30 bps (base rate: 1.2%). The MNB considered it justified to continue the cycle of interest rate hiking by taking firm steps on a monthly basis to ensure price stability, avoid second-round inflationary effects and to anchor expectations. The tightening cycle will continue until the outlook stabilizes around target and inflation risks become evenly balanced. Hungarian July CPI, published yesterday, slowed to 4.6% Y/Y but remains above the 1% tolerance band around the 3% inflation goal.
