Written Commentary
Digesting Fed minutes, China Inflation, German Trade and UK RICS House Price survey as Persian Gulf developments remain centre stage; busier run of central bank speakers and June ECB minutes.
- FOMC minutes confirm hawkish bias, with discussion about inflation risks from AI demand perhaps most notable aspect.
- China: Inflation data broadly in line with forecasts, weak domestic demand continues to contain CPI, while surging coal prices offset energy, metal and chemical price falls in PPI.
Q2 The Ghost In The Machine – Out Now
EVENTS PREVIEW
All eyes are once again focused on the Persian Gulf, as yesterday’s terse FOMC minutes are digested, as markets await the June ECB minutes today.
There are China’s CPI & PPI, German Trade and the UK RICS House Price Balance to digest, with only US weekly jobless claims and Existing Home Sales ahead, along with June ECB minutes and ECB, Fed, SNB and BoE speakers, and the annual Chatham House conference. The latter will find its focal points in AI related security risks, along with the conflicts in the Persian Gulf and Ukraine, and the rising tensions within NATO.
The FOMC minutes underlined the hawkish shift at the Fed, but while a ‘few’ policymakers saw the case for raising rates in June, they either did not dissent or are not voters this year; per se, markets have opted for only a marginal shift higher in their rate expectations. Of specific note was the inflation discussion, which obviously considered risks from energy prices, but more importantly, the potential for AI related demand to pressure prices higher. While this is unsurprising, the fact that this is being actively discussed also limits the scope for rates relief from setbacks in energy prices.
Today’s German trade data was much better than expected with a sharp rebound in exports to the US (23.1% m/m) and to a lesser extent China (7.1%) pacing the overall 0.9% m/m gain, but the sharp fall in imports (-2.5% m/m) also suggests domestic demand destruction, even if it also implies a solid contribution to Q2 GDP from net exports, though contingent on the June data confirming the signs of economic resilience from this week’s run of data.
While Lagarde has stuck to her signal of another rate hike (likely in September), as well as touting signs of greater growth resilience in the face of the energy price shock, other ECB speakers have been rather more ambivalent since the June 10/11 meeting, especially given the fall in June CPI. But with oil and gas prices rebounding, the ECB’s messaging on the rate outlook will likely remain hawkish.
** China – June CPI and PPI **
Both CPI at 1.0% y/y and PPI at 4.1% y/y were basically in line with expectations, but with both falling -0.3% m/m in no small part due to falling crude prices, the upward momentum on inflation of recent months looks to be faltering, even if continued falls in food prices played a role. Core CPI remained weak at 1.0% y/y, and the details continue to highlight the contribution from weak consumer demand, with autos, home appliances and large ticket item prices all falling on the month. If it were not for surging coal prices (up 21% y/y), PPI would be a lot lower, with oil prices dropping sharply (-12% m/m) along with non-ferrous metals and a modest decline in chemical materials. While three years of producer price deflation may be over, there was again little to suggest that the underlying inflation trend remains very weak.
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