Markets
May US PCE deflators, the Fed preferred inflation gauge, provided a reality check yesterday as the Warsh Fed last week explicitly committed to deliver on its price stability mandate given ongoing resilience in US growth and the labour market. The PCE report was very close to expectations. The headline May PCE deflator rose by 0.4% M/M resulting in the first 4%+ outcome since April 2023. Underlying inflation rose by 0.3% M/M and 3.4% Y/Y (up from 3.3%). Details showed goods inflation accelerating from 4.4% Y/Y to 4.8% Y/Y and services inflation from 3.5% to 3.8%. Services inflation excluding shelter came in at 3.9% Y/Y, all moving ever further away from the Fed’s 2% target. At the same time, activity and spending data confirmed US economic resilience with strong May income and spending data (both +0.7% and better than expected), low weekly jobless claims (215k) and solid underlying durable goods orders. US Q1 GDP was also upwardly revised from 1.6% Q/Qa to 2.1%. After yesterday’s US data releases, the KBC nowcast puts expected US Q2 growth at 2.74% (Q/Qa). This suggests that the US economy is performing above potential growth. Yesterday’s data only reinforce the case for the Fed to prioritize inflation as ‘guided’ by Fed chair Warsh. However, some of the market reposition had already occurred end last week and early this week. The US curve (re)steepened slightly with the 2-y easing -2.3 bps while the 30-y added 2.1 bps. Equity markets showed somewhat of a diffuse picture despite blow-out Micron results published on Wednesday evening. A positive market response to this news was complicated by Apple announcing price hikes for several of its flagship products to cope with higher cost for memory ships and by rumours of a delay to OpenAI’s IPO plans. The Nasdaq closed modestly lower (-0.46%) after a nervous open. Changes on the German curve also remained modest, with yields declining 1-2.5 bps across the curve. The pause in the (US) yields repositioning also spilled over to the US dollar. After breaking some key resistance levels earlier this week, the USD rally ran into resistance (DXY 101.43, EUR/USD 1.1370).
Risk sentiment turned again negative this morning in Asia with the Japanese Nikkei declining by 4.5% and the Kospi ceding 7% as uncertainty resurfaces. US yields in this risk-off context also tentatively ease a bit further as does the dollar. (EUR/USD 1.138, USD/JPY 161.6). Later today, risk sentiment probably will remain the dominant factor for global trading. Regarding the data ECB May inflation expectations and University of Michigan consumer confidence (also including inflation expectations data but final figure) are worth looking at even as we don’t expect them to be ‘gamechangers’.
News & Views
Prices in the Japanese capital were unchanged on a headline level in June, ticking up from 1.4% to 1.7% in the Y/Y-comparison. Both core measures increased by 0.1% M/M. Core CPI ex fresh food rose from 1.3% Y/Y to 1.6% Y/Y. Stripping out energy as well put the figure at 1.9% from 1.6%. The headline figure was distorted by measures to cap gasoline prices and by a temporary water-charge waiver. Today’s Tokyo numbers are an early indicator for national inflation numbers published on July 24. They continue to bolster the case of a continuation of the BoJ’s gradual policy normalization cycle. Japanese money markets currently discount a rate hike by the December meeting.
EU member states voted to extend the suspension of retaliatory tariffs on US goods tied to the Boeing-Airbus dispute. They cover about $4bn worth of American products including aircraft, tobacco and spirits. The move extends a truce in place since 2021 with the exact duration still being under discussion. The decision helps smoothen transatlantic trade relations with EU member states also approving the trade deal reached with the US last year ahead of the July 4 deadline imposed by US president Trump. Under the agreement, the EU pledges to scrap tariffs on a broad array of American industrial products while opening its market further to US farm goods and seafood.
