US Inflation Continues to Cool

For the week ending 12 July 2024

Global equities pulled back from record highs on Thursday as investors rotated from large- cap tech to small caps and other overlooked pockets of the equity markets after a benign US inflation report, though the large-cap rally resumed Friday morning. From a week ago. the yield on the US 10-year Treasury note fell 13 basis points to 4.21% while the price of a barrel of West Texas Intermediate crude was little changed at $83.20. Volatility, as measured by the Cboe Volatility Index (VIX), remained very low at 12.4. 

MACRO NEWS

US consumer prices surprise to downside

At the headline level, the US Consumer Price Index declined 0.1% in June and rose only 0.1% after stripping out food and energy. Core services inflation ex housing, the so-called supercore measure, contracted for the second month in a row. On a year-over-year basis, CPI rose 3% while core prices grew 3.3%. The shelter component of the index, until this month one of the stickiest, was the lowest since January 2021, rising just 0.17% on the month. Bonds rallied on the data and on comments from US Federal Reserve Chair Jerome Powell, and rates markets fully priced in a cut for the September FOMC meeting followed by a second in December. 

Powell says risks are two-sided

Fed Chair Powell testified on Capitol Hill Tuesday and Wednesday and acknowledged that the US labor market had returned to prepandemic conditions and that, as it cools, the labor market is becoming a bigger part of the Fed’s calculation. Investors will watch incoming jobs data closely for signs of weakness, which could accelerate Fed rate cuts. More good data, received on Thursday morning, would give Fed policymakers increased confidence that inflation is heading toward its 2% target, Powell testified. Commercial real estate loans are likely to be a risk for years, he said, but noted that recent stress tests showed that large banks are well placed to withstand a deep downturn. 

With hung parliament, France faces gridlock

The strategy employed by the left-wing and centrist political blocs in France to deny the right-wing National Rally a parliamentary majority worked brilliantly, plunging Marine Le Pen’s group to third place in Sunday’s final round of voting after her party won the first round. But what comes next is anybody’s guess. The left-wing New Popular Front (NFP) took the largest number of seats in the National Assembly but fell far short of a majority. President Emmanuel Macron’s Ensemble came in second, followed by the National Rally. Macron has called for the formation of a national unity government to block the tax-and-spend policies of the NFP. Cracks are already appearing in the left-wing bloc, suggesting the formation of a government could take time. Macron has asked the current government to stay on as a caretaker while negotiations continue. 

Pressure to withdraw builds on Biden

Pressure from fellow Democrats to step aside as his party’s presidential nominee continues to build on US President Joe Biden more than two weeks after his poor debate performance against former President Donald Trump. Despite Biden repeatedly saying he would not leave the race, elected officials, celebrities and influential donors continue to work to remove him from the ticket, fearful that a weakened president could hurt Democrats’ chances further down the ballot. On Thursday, the New York Times reported that close allies of the president are developing a case for why he should end his reelection campaign. It also reported that his campaign has begun to test the strength of Vice President Kamala Harris against Trump in a head-to-head survey of voters. Despite a relatively strong Biden showing at a press conference on Thursday evening, several Democratic members of the House of Representatives joined those already calling on the president to end his campaign, bringing the total to 17. So far, only Peter Welch (D-VT) is the only sitting senator to publicly call for Biden to step aside.

QUICK HITS

Friday’s US producer price data were less disinflationary than the data in Thursday’s CPI report. The Producer Price Index rose 2.6% year over year in June, higher than the initial May reading of 2.2%. Core PPI rose 3%, up from May’s initial 2.3%. The PPI components that feed into core PCE were benign, with that measure forecast to rise less than 0.2% when it is released on 26 July. 

US nonfarm payrolls rose 206,000 in June, but the prior two months’ were revised downward by 111,000. The unemployment rate continued to edge up, reaching 4.1%. 

The British economy grew 0.4% in May, double economists’ forecasts. The pace of annual GDP growth rose to 1.4 %, higher than the 1.2% forecast. The strong data, combined with soft US inflation readings, pushed the pound to its highest level against the US dollar in nearly a year. 

In one of her first acts as the United Kingdom’s new chancellor of the exchequer, Rachel Reeves, announced the formation of a new national wealth fund that the Labour government hopes will foster billions of pounds of investment in new and growing industries. 

AI-inspired demand for semiconductors pushed Taiwan’s exports in June to their highest level since 2022.

Japan’s Nikkei 225 Index closed at a record 42,224 on Thursday. 

Germany announced Wednesday that it will remove Huawei equipment from its mobile phone networks. 

Japan’s Ministry of Finance is believed to have taken advantage of a falling dollar in the wake of benign US June inflation data to intervene in support of the sagging yen on Thursday morning. The currency strengthened about 1.8% on the day.  

Bank of England Chief Economist Huw Pill said the recent rise in the price of services, coupled with similarly rapid rises in wages, are troubling signs of strength in underlying inflation.

Hezbollah leader Hassan Nasrallah said this week that the group will abide by whatever agreement Hamas makes with Israel. Moving Hezbollah away from the Israeli border won’t resolve the crisis, he said, but indicated that if there is a ceasefire in Gaza, Hezbollah will halt attacks against Israel.

In an effort to curb short sales and boost stock prices, China’s securities regulator this week suspended securities lending activities. The regulator also called for closer scrutiny of algorithmic trading programs. 

THE WEEK AHEAD

China’s Third Plenum, a twice-a-decade gathering of top policymakers, will begin Monday in Beijing, as will the Republican National Convention in Milwaukee. Also on Monday, Fed Chair Jerome Powell will be interviewed by David Rubenstein. On Tuesday, US retail sales numbers will be released. UK and eurozone CPI is due on Wednesday, as is the Fed’s Beige Book. The European Central Bank will meet Thursday. No change in interest rates is expected. UK and Canadian retail sales will be released Friday.