US August CPI inflation data took center stage today. Both headline and core inflation slowed on a monthly and yearly basis, generally coming in below consensus. The headline reading printed at 0.3% M/M and 5.3% Y/Y, implying a fourth month straight of 5%+ inflation. Core inflation rose by 0.1% M/M, to be up 4% Y/Y. It was the slowest monthly increase for the core gauge since February. Details showed an impact from the Deltavariant outbreak via for example monthly declines in lodging away from home (-2.9% M/M) and airline fares (-9.1% M/M). Bloomberg Economics broke the CPI figure down in re-opening components and non-reopening components. The former contributed -0.22% to the monthly decline in CPI while the latter contributed 0.35%, the most since December 2016. Used car prices seem over their top as well (-1.5% M/M) while the semiconductor shortage continues to put upward pressure on new car prices. Owners’ equivalent rent of residence doesn’t show the feared acceleration yet; rising at a steady 0.3% M/M.
Markets reacted following the “dovish” interpretation of the inflation numbers i.e. siding with the Fed’s temporary inflation argument and suggesting that the doves inside the FOMC gain some additional leverage to postpone the effective start of slowing down net asset purchases by some months. A below-par September payrolls is their other argument to buy some time still. We still expect a tapering announcement at next week’s FOMC meeting and argued before that a small time lag between announcement and start could be the resulting quid pro quo. In our base scenario, net asset purchases grind to a halt by mid next year, allowing for a first rate hike by the end of 2022. In any case, US Treasuries outperformed German Bunds today. US yields shed 0.6 bps to 1.4 bps with the belly of the curve outperforming the wings. German yields add 0.5 bps to 1 bp across the curve. 10-yr yield spread changes vs Germany are broadly unchanged with Italy (-3 bps) outperforming. Relative yield dynamics played in the dollar’s disadvantage with EUR/USD jumping from 1.18 to 1.1840 on the release. The trade weighted dollar tests last week’s low at 92.33. USD/JPY is still pivoting around the 110 big figure.
News flow was extremely thin apart from the US CPI. We retain sterling strength, probably related to the UK vaccine booster drive since strong UK labour market data didn’t spark an immediate market reaction this morning. EUR/GBP changes hands in the low 0.85 area. GBP/USD takes out 1.39 for the first time since early August.
Swedish inflation accelerated significantly in August. The headline number jumped from 1.4% y/y to a consensus-beating 2.1%. Inflation measured using a fixed interest rate (CPIF), the Riksbank’s favorite gauge, soared from 1.7% to 2.4%. Core CPIF stripping energy prices rose from 0.5% y/y to 1.4%. Clothing & footwear, household goods and restaurants & hotels all spurred last month’s price increases. The August reading was higher than the Riksbank projected in its July inflation report and is probably going to result in an upward revision of its inflation forecast when governor Ingves reconvenes next week. CPIF in the last report was seen at 1.7-1.8% the entire policy horizon. Being below the 2%-target, the central bank did not pencil in any rate hikes until deep in 2024. Today’s outcome at the very least questions this flat rate path. The Swedish krone strengthened from EUR/SEK 10.16 to 10.13.
The EU returned to the bond market today. It was selling seven-year debt for which it pulled another massive orderbook worth more than 85bn euros. The EU eventually tapped 9bn of bonds maturing in 2028 via banks with a pricing set at 14 bps below swap. The sale is part of the EU’s €800bn big recovery programme of which roughly a third will be in green bonds (sale starting in October). The European bloc will also start selling short-dated bills for the first time tomorrow.