Markets
The Fed’s preferred inflation measure (PCE deflator) showed no surprises in July. The headline index increased by 0.2% M/M and stabilized at 2.6% Y/Y. The core PCE deflator rose by 0.3% M/M with the annual number printing at 2.9% from 2.8%. Core PCE deflation is sticky between 2.6% Y/Y and 3% Y/Y since December 2023. Just like in the July CPI inflation report, services inflation (0.4% M/M) added most weight to deflators with goods’ costs – closely watched for tariff-related inflation – even declining. Today’s deflators vindicate Fed chair Powell’s dovish pivot at Jackson Hole with risks of a permanent increase in price levels decreasing as time passes by. If any, US Treasuries trade a tad softer after the release, which was accompanied by strong – but in line with consensus – personal spending data (+0.5% M/M), pointing at resilient demand in the US economy. The US yield curve bear steepens with yields rising by up to 3 bps at the very long end of the curve. US investors enjoy a long weekend now with markets closed on Monday for Labor Day Holiday. Afterwards, activity (traded volumes) traditionally pick-up, leaving scope for further (dovish) repositioning if data warrant so. With manufacturing ISM on Tuesday, JOLTS jobs report on Wednesday, ADP employment change and services ISM on Thursday and payrolls on Friday there are plenty of possible drivers. With the Fed steering towards a gradual, 25 bps, rate cut in September, anything that comes close to a deteriorating US labour market could be a trigger to repositioning for three instead of two Fed rate cuts this year. The legal battle between US President Trump and Fed governor Cook remains a wildcard.
National European inflation numbers left no trace on trading neither. A small upward surprise in Germany was compensated for by lower than expected Italian and Spanish numbers. Tuesday’s EMU outcome will thus be very close to the current consensus (0.1% M/M and 2% Y/Y for headline; 2.2% Y/Y for core) and implies that current ECB policy is in a good place. EMU money market still add a 1/3 possibility to an additional ECB rate cut before year-end, but that’s not our base scenario. Consumer inflation expectations stayed unchanged for the year-ahead at 2.6% in July, but ticked up from 2.4% to 2.5% on a 3-yr horizon. The EMU eco agenda is very light next week apart from the inflation number. German yields gain up to 1.7 bps (10-yr) today. EUR/USD is stuck within an extremely tight range today (1.1650-1.1690).
News & Views
The Indian rupee plunged to a record low against the US dollar. While Q2 GDP numbers today printed a better than expected 7.8% y/y, forward-looking investors fear the economic impact of president Trump’s international trade policy on future growth. USD/INR pierced through the 88 barrier following the US administration’s decision to double the 25% import levy to 50%, penalizing India for its purchases of Russian oil. The tariffs would have the biggest impact on India’s labor-intensive industries such as textiles and jewelry, putting a lot of jobs at risk. The 50% tariff also puts the country at the disadvantage compared to US-exporting peers such as Japan (15%), Vietnam (20%) or China (30%). Indeed, the rupee today also tanked to a historical low against the Chinese yuan.
Polish inflation in August eased a tad more than anticipated. Prices dropped 0.1% on a monthly basis, lowering the yearly outcome to 2.8% from 3.1%. It’s the slowest pace since June 2024 and is considered to be low enough for the central bank to reduce the policy rate again to 4.75% from 5% at next week’s meeting. Details are lacking with the statistical office in Poland’s statement only revealing that the m/m drop mainly came on the account of fuels for personal transport equipment (-1.9% m/m). Food and non-alcoholic beverages eased 0.1% while prices for electricity, gas and other fuel rose by 0.1%. KBC Economics’ estimate for core inflation (to be officially released September 16) stands at 3.4% y/y. Today’s numbers had little impact on the Polish zloty. EUR/PLN is moving directionless within a symmetrical triangle since mid-April and is currently trading around 4.266.
