Market sentiment has rebounded strongly from the volatility-driven episode at the start of August. US data indicated that recessionary trades had been overdone, unlocking equity upside that had spillover effects across other regions, with risk-on sentiment also reflected in USD weakness. The Fed now looks more likely to start its easing cycle with a conventional 25bps cut rather than the frontloaded 50bps move earlier priced. The RBNZ joined the group of central banks now easing policy announcing a 25bps cut to 5.25% and giving dovish guidance.
Key US data published this week saw recessionary fears ease and inflation soften further, with markets repricing for a more measured start to the Fed's rate-cutting cycle. Public commentary from Fed officials has broadly given the nod to a September rate cut going into next week's Jackson Hole Symposium where a more formal pivot to policy easing is expected to be communicated by Fed Chair Powell. Retail sales for July posted upside surprises across the board in terms of headline (1.0%m/m vs 0.4% exp) and core sales (0.4%m/m vs 0.2%) as well as in the control group (0.3%m/m vs 0.1%) that markets view as the cleanest gauge of the pulse of consumer spending. This followed a stronger-than-expected rise of 0.9% in control group sales in June, highlighting that despite factors such as slowing employment, reduced household savings and higher interest rates underlying demand is holding up.
Data on US consumer and producer prices this week should play into giving the Fed the 'greater confidence' it has spoken of needing to conclude inflation is on track to return to the 2% target and then stay there. Headline CPI printed at 0.2%m/m in July and 2.9%yr (from 3.0%) and the core rate was 0.2%m/m and 3.2%yr (from 3.3%), with all outturns in line with market forecasts. Based upon these readings and those for producer prices (headline: 0.1%m/m, 2.2%yr; core 0.0%, 2.4%yr), markets anticipate the core PCE deflator - the Fed's preferred inflation measure - to come in at around 0.2%m/m and 2.7%yr in July. Although that would be a slight uptick in the annual pace from 2.6%, markets are more attentive to the month-on-month pace. A projected 0.2% outcome for July would be around what was seen in May (0.1%) and June (0.2%), a profile that, over time, would be consistent with meeting the Fed's 2% inflation target.
Solid growth in the UK and elements of stickiness in inflation point to the BoE holding in September following its decision to start cutting rates earlier this month. Economic activity expanded by 0.7% in Q2 to be up by 1.3% through the first half of the year, a sharp contrast to the weak back half in 2023 (-0.4%). This swing was driven largely by household consumption (0.6% from -1%) as cooling inflation boosted real incomes, unlocking renewed demand.
On UK inflation, headline CPI printed at 2.2%yr in July, up slightly from June (2.0%) but below consensus (2.3%); meanwhile, the core rate continued to ease coming in at 3.3%yr (vs 3.4% exp) from 3.5% previously. A key factor behind the softer core reading was services inflation slowing from 5.7% to 5.2%. Although moving in the right direction, core inflation and services prices - the part of the CPI basket of most importance to the BoE - remain elevated for a central bank now easing policy. Labour market tightness - also a key consideration for the BoE - while showing signs of easing, mainly in reduced vacancies (now down 32% on the cycle peak), is still reflected in wages growth. Weekly earnings (ex-bonuses) eased to an annual pace of 5.4% from 5.7% in this week's report.
Appearing with the RBA's top officials at a parliamentary testimony, Governor Bullock again delivered direct pushback on prospects for a near-term rate cut in Australia. This places the RBA in contrast to many of its central bank peers in easing mode. While the RBA clearly doesn't want to hike any further, the data aren't allowing a dovish pivot either. That was reiterated by this week's data on the labour market. Employment outperformed expectations for the 4th month running surging by 58.2k in July, driven entirely by full time employment (reviewed here).
Like many labour markets overseas, conditions are less tight than earlier in the cycle - the unemployment rate lifted from 4.1% to 4.2%, its highest since early 2022 - but are still robust overall. Encouragingly, developments on the supply side were also positive; the participation rate increased to a new record high of 67.1%, while hours worked saw back-to-back rises (0.3%m/m). Consistent with a labour market coming into a closer demand-supply balance, wage pressures have eased. In Q2, the Wage Price Index was softer than expected at 0.8% (vs 0.9%), leaving the annual pace at 4.1% (reviewed here).
