Did the Fed’s preferred inflation measure ease in July?
The US Federal Reserve’s preferred gauge of inflation, the Core Personal Consumption Expenditure (PCE) price index, is expected to have fallen in July, after Consumer Price Index figures fell short of expectations. last month and an unexpected drop in producer prices.
Consumer price growth and producer prices moderated in July largely due to lower gasoline prices, and Friday’s PCE report is expected to follow this inflationary trend.
The core PCE index – which excludes volatility in food and energy prices – is expected to have risen 0.3% from a monthly gain of 0.6% in June, according to economists polled by Reuters.
“Weakness in medical services, airline tickets and financial services prices in the July PPI significantly reduced the July PCE price translation compared to what we had expected after the July CPI,” UBS analysts said in a note. They expect core PCE inflation to fall to 4.5 or 4.6% from an annualized rate of 4.8% in June.
The PCE rose more than expected to hit an annualized high of 6.8% in June, dashing hopes that headline inflation peaked at 6.6% in March. High gasoline prices likely contributed to the worse-than-expected headline figure, but the base figure rose to 4.8% in June from a year earlier, from 4.7% in May.
The PCE stock reading has been susceptible to substantial movement this year, given the volatility in the energy and food sectors which has been exacerbated by the war in Ukraine.
Fed Governor Christopher Waller said in a July 14 speech that he expects monetary policy to be tight until there is a “sustainable reduction” in the base figure.
The Fed raised its benchmark interest rate by 0.75 percentage points for the second consecutive month in July to fight inflation. Minutes from the July meeting show that Fed officials are planning more rate hikes at future meetings. Alexandra White
Did Eurozone trade activity decline further last month?
The gloom surrounding the euro zone economy is expected to worsen on Tuesday, when a benchmark business survey is expected to show a further decline in orders, output and confidence.
While tourism and hospitality-related services have been boosted this summer by the lifting of most coronavirus-related restrictions, the benefits of this are set to be negated by a growing number of offsetting factors.
Russia is cutting natural gas supplies to Europe, Italy is in political turmoil and record inflation is eroding household spending and business investment, convincing many economists the euro zone is heading towards recession.
Jessica Hinds, senior Europe economist at Capital Economics, said in a note to clients last week that the economic benefits of easing pandemic restrictions “already appear to be fading and the headwinds to growth are strengthening.”
S&P Global’s Flash Composite Eurozone Purchasing Managers’ Index is expected to confirm that pessimistic outlook on Tuesday, as its reading for the eurozone is expected to drop from 49.9 in July to 49.5 in August.
It would be the second month in a row that the index has fallen below the crucial 50 mark that separates growth from contraction – something until July had not happened in the eurozone since the start of last year.
“We had a recession in our central forecast for a while; i.e. technical in the third and fourth quarters,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, who expects a steeper drop in the eurozone PMI at 48. “We believe the Eurozone economy is now in recession. Germany, at the very least, is. Martin Arnold
Why didn’t higher interest rate expectations boost the pound?
UK inflation hit a 40-year high of 10.1% in July and the rapid pace of price growth has raised expectations of more aggressive interest rate hikes from the Bank of London. ‘England.
Higher interest rates tend to boost a country’s currency, as they support foreign investment and demand for a currency compared to those in countries with lower rates.
But since the last release of UK consumer price index data on Wednesday, the pound has slipped around 1% against the dollar.
The pound is down more than 10% against the dollar this year and just under 1% against the euro, although the European Central Bank has only raised rates out of negative territory in July.
Some analysts say the pound’s poor performance can be attributed to the gloomy economic outlook for the UK. The BoE predicts that the UK will soon enter five quarters of recession. A fall in gross domestic product would, in theory, reduce the attractiveness of the pound against other currencies.
“Currency goes down because the market sees a negative impact on growth [from higher rates]”, said James Athey, chief investment officer at Abrdn. “Sterling clings to the growth outlook rather than the rate outlook.”
July’s CPI data triggered a sell-off in short-term UK gilts, which are sensitive to interest rate expectations, as debt yields hit highs not seen in 2008. Bond yields increase as their prices fall.
The pound’s weakness has raised questions about the UK’s longer-term economic health.
“Rising rates and falling currencies are seen more often in emerging markets than in developed markets and it is possible that [suggests] markets [are] calling into question the credibility of longer-term UK policy,” said Adam Cole, chief currency strategist at RBC Capital Markets.
The likelihood of increased fiscal spending to tackle the cost-of-living crisis, increasing UK borrowing, is likely to weigh further on the pound, Cole added. Ian Johnson