Markets
US producer price inflation rose by 0.1% M/M in July for the headline number and stabilized for the gauge excluding food and energy. Both were below consensus (+0.2% M/M), resulting in sharper-than-expected drops in the Y/Y-figures. Headline PPI printed at 2.2% from 2.7% and core PPI at 2.4% from 3%. Details showed a discrepancy between a first monthly drop in services costs this year (-0.2% M/M) and an acceleration in prices for goods driven by gasoline costs (+0.6% M/M). The PPI release triggered a small outperformance of US Treasuries with the front end of the curve outperforming. Markets argue that waning price pressures free up the hands of the Fed to respond to a slowing economy in September. The balance between taking off with a 25 bps or a 50 bps rate cut shifted from 50/50 ahead of PPI’s to 40/60 in favour of the larger move after the PPI’s. That contrasts with post July FOMC-speak suggesting that such larger cut is not something they are considering. US yields currently cede 4.1 bps (30-yr) to 6.5 bps (2-yr). Early last week’s lows remain out of reach for now though. German yields head south as well. Yields started drifting away after disappointing German ZEW investor sentiment (see News & Views) and trade 3 to 5 bps lower. EUR/USD initially lost out but recovered on USD weakness with the pair rebounding from an intraday low around 1.0915 to currently 1.0965. US stock markets open positively, rising by up to 1.15% for Nasdaq at the bell. At the time of finishing this report, Israeli reports of two Hamas rocket attacks against Tel Aviv are sparking some additional (risk-off) volatility. US officials yesterday already warned for retaliatory attacks after last week’s assassination of an Hamas leader in Tehran.
Solid UK labour market data helped sterling at the start of trading. EUR/GBP set an intraday low at 0.8531 from a start at 0.8563. Cable (GBP/USD) rose from 1.2770 to 1.2818. UK employment rose by 97k in the April-June quarter, beating 3k consensus. The first indication for Q3 (July payrolls) was better-than-hoped as well (+24k vs +10k expected). A significant increase in jobless claims (+135k in July) was the odd one out. Weekly earnings ex bonuses rose as expected by 5.4% annualized in Q2. UK Gilts initially underperformed, but eventually followed the global bond rally. Later this week, we’ll still see CPI data, Q2 GDP and retail sales
News & Views
German ZEW investor sentiment deteriorated significantly in August, falling from 41.8 to 19.2 (expectations component; lowest since January 2024). The assessment of the current situation was less bright as well, falling from -68.9 to -77.3. Both outcomes were below consensus. The ZEW institute in a comment warned that the German economic outlook is breaking down. In a global setback, especially the export-intensive German sectors are at risks. High uncertainty, driven by ambiguous monetary policy, disappointing business data from the US economy and growing concerns over an escalation of the conflict in the Middle East drive the pessimism.
The International Energy Agency expects world consumption to increase by just under 1mn barrels/day this year and next as growth is tempered by the subdued economic backdrop and a shift toward electric vehicles. That’s significantly below OPEC’s suggestion yesterday of 2.1mn b/d growth this year. The IEA believes that the oil market will move from deficit to surplus next quarter if OPEC+ proceeds with plans to boost supply. “For now, supply is struggling to keep pace with peak summer demand, tipping the market into a deficit,” the IEA said. “As a result, global inventories have taken a hit,” with stockpiles declining in June by 26.2 mn barrels.” Brent crude more or less holds to yesterday’s Middle-East tensions’ driven increase, trading at $81.5/b.
Graphs
GBP/USD: combination of GBP strength (UK labour market data) and USD weakness (PPI)
US 2-yr yield: money markets lift probability of 50 bps rate cut lift-off by the Fed from 50% to 60%
Brent crude: clings to gains related to Middle-East tensions in spite of more warnings of slowing oil demand growth
Nasdaq extends rebounds as slowing inflation frees the hands of the Fed to support a slowing economy
