US headline inflation in August rose 0.1% m/m, defying (commodity driven) expectations for a 0.1% decline. Year-on-year, prices grew by 8.3%. While down from 8.5% in July, the cooldown was less than the 8.1% hoped for. Core measures even surged 0.6% m/m. That’s double the pace analysts’ foresaw and that of July. Compared to August last year, core inflation quickened to 6.3% (vs 6.1% consensus). Energy indeed weighed considerably on prices last month, tanking 5% m/m. But many other categories clearly provided a significant counterweight. These include the notoriously sticky shelter component (0.7% m/m), new vehicles (0.8%) and transportation services (0.5%). Investors were (too) confident in thinking that inflation would cool down quickly and that it could remove some of the enormous pressure on the Fed. In the summer, we’ve seen a similar thinking play out. Back then recession fears drove the correction in yields. In both cases, however, reality forces markets to reassess. Today’s report caused a mini crash on bond markets. US yields swap losses of more than 6 bps for stunning gains in a matter of seconds. The curve flattens with changes going from +2.7 bps (30y) to 15.3 bps (2y). The 2y yield forces a decisive push through recent resistance levels just north of 3.5% to set a new 15-year high (3.74%). This opens technical opportunities for a return to the psychological 4%. A 75 bps move at the Fed meeting next week with this data is a done deal. US money markets indeed discount a more than 100% chance. They even attach a 65% probability for a similar move in November. European yields get caught in the slipstream, with swap yields adding 6.4-10.4 bps in a flattener. Here too, the 2y tenor steams ahead to new cycle highs (2.37%). Next stop: 2.5% (2011 high). The sharp rise in real yields – the 10y one in the US hits 1% for the first time since 2018 – hurts equities and other risky assets. The EuroStoxx50 tumbles 1.4% in the red, reversing gains of 1%. American indices gap lower at the open. The Nasdaq suffers the biggest losses (-2.7%). Brent oil slips sub $95/b after the inflation release, snapping a three-day winning streak.
Dollar strength is back after a two-day sabbatical. The greenback roars back against all G10 peers with the trade-weighted index rebounding from 108 support to 109.14 currently. 109.29 marks the previous cycle high (July) and serves as immediate resistance and is probably soon up for a test. EUR/USD’s comeback over the previous days ends in tears. A second attempt to escape the 2022 downward trend channel reversed instantly. The pair fell from just south of 1.02 to close to parity again. USD/JPY (144.6) is on track to close at a new 44-year high.
The UK unemployment rate in the three months to July dropped from 3.8% to 3.6%, the lowest level since 1974. While good news at first sight, the underlying dynamics suggests a more mixed picture. The decline in the unemployment rate was for an important part due to people leaving the labour market, raising the inactivity rate by 0.4% to 21.7%. At the same time, employment growth in the 3mths to July slowed the 40k from 160k, a figure substantially weaker than expected. The total actual weekly hours worked in the 3 months to August also declined and stays below the pre-corona level. Weekly earnings growth (ex-bonuses) accelerated faster than expected from 4.7% 3M Y/Y to 5.2%. However, this is still well below the headline inflation which printed at 10.1% in July. August UK inflation will be published tomorrow morning. Vacancy data also suggest a tentative loss of momentum in the UK labour market. Available jobs in the June-August period declined 34 000, albeit to a still high 1.266 mln.
According to reports from German daily Handelsblatt and sources at the Ministry of Finance, the German government intends to use a mechanism set up to support companies at the time of the corona crisis to support struggling energy firms. State Development Bank KFW is said to be able to use €67 bln of the WSF Stabilization Fund to provide liquidity assistance and guarantees to struggling energy companies as they have to cope with higher prices and growing liquidity needs to meet a sharp rise collateral claims. The German cabinet is expected to approve the measures on Wednesday.