Last week the US inflation data and Fed Chair Jerome Powell’s commentary in his semi-annual monetary policy report before the House Financial Services Committee and then the Senate Committee on Banking were key focuses. On Tuesday, the US inflation data erred on the strong side again: Headline CPI for June came in at 5.4% yoy, the largest rate of increase since August 2008, and well ahead of expectations for a 4.9% yoy increase. The core rate of CPI came in at 4.5% yoy which was the greatest increase since November 1991, and also well ahead of expectations of 4% yoy. Nevertheless, Federal Reserve Chair Jerome Powell’s tone was on the dovish side: On Wednesday he reiterated that although inflation had risen over the last few months inflationary pressures “should partially reverse as the effects of the bottlenecks unwind.” While he highlighted that conditions in the labour market are improving, he noted “there is still a long way to go”. On Thursday, Powell acknowledged: “The challenge we're confronting is how to react to this inflation, which is larger than we had expected - or that anybody had expected. And to the extent it is temporary, it would not be appropriate to react to it. But to the extent it gets longer and longer, we'll have to re-evaluate the risks”.
Other key US data releases included June retail sales which gained 0.6% mom against expectations of a 0.4% decline. However, the preliminary reading of the July University of Michigan Sentiment gauge disappointed at 80.6 against expectations of 86.5 (Bloomberg survey) and the prior reading of 85.5: inflation concerns had an impact and Richard Curtin the survey director noted that "Consumers' complaints about rising prices on homes, vehicles, and household durables has reached an all-time record”. USTs came under some pressure on Tuesday but then recovered into the end of the week: the UST 10 year yield tightened 7 bps to 1.29% and the curve flattened with the 5s30s spread tightening 6bps to 114ps. The S&P 500 ended the week 0.97% lower. European Government Bond yields broadly tightened as well.
In terms of other central banks, the RBNZ said it will cease its bond buying programme by July 23 and the Reserve Bank of Canada also announced that it would trim its net asset purchases to C$2bn per week. The BoJ made no changes to its main policy settings but adjusted the economic forecasts: FY’21 GDP was revised down to 3.8% from 4% although FY’22 was revised up to 2.7% from 2.4%. FY’21 inflation was revised up to 0.6% from 0.1% for 2021 and FY2022 was revised up to 0.9% from 0.8%. In China, the focus was on the 2Q GDP data which increased 1.3% qoq, ahead of expectations of 1% qoq. On a year on year basis it increased 7.9% against expectations for an 8% increase. June retail sales and industrial production data also exceeded expectations gaining 12.1% yoy and 8.3% yoy, respectively. Overall, the data allayed some concerns about signs of slowing growth following the recent reserve requirement cut.
In the week ahead, the resurgence of covid infections remains a concern as economies try to reopen. The UK continues to reopen but infections continue to rise and in parts of Europe some restrictions are being reimposed as infections rise. In terms of central bank news the ECB meeting on Thursday will be a key focus for any changes to the statement language on interest rates and bond buying following the recent inflation target review and shift to a 2% target. The PBoC’s 1 year and 5 year loan prime rates are due for review on Tuesday but are expected to remain unchanged at 3.85% and 4.65% respectively. Other central bank meetings include the Central Bank of Russia on Friday where another rate hike is expected: the central bank has already tightened by 125bps since March but inflation remains a concern. The minutes of the last RBA meeting are also due on Tuesday. Central bank speakers due to appear this week include Johnathan Haskell for the BoE with a speech on “Will the pandemic scar the economy?”. There are no Fed speakers due this week due to the media blackout ahead of the July 27-28 FOMC meeting.
A slew of preliminary readings of the July Markit PMI data for the US, Eurozone, UK are expected on Friday which will be of interest for any indications of slowing growth momentum. The US manufacturing and services PMIs are expected to ease very slightly from the prior month with the Bloomberg survey looking for readings of 62 and 64.5, respectively. In the UK manufacturing is expected to slow to 62.3 from 63.9 and the services reading ease to 62. In the Eurozone, the Bloomberg survey is looking for the manufacturing PMI to ease to 62.5 from 63.4 but for services to recover to 59.3 from 58.3. US data releases include US building permits, housing starts and existing home sales for June and the Chicago Fed National Activity Index for June. Otherwise, the US earnings season continues with a large number of corporates due to release results.