Markets took a cautious breath after July's consumer inflation figures arrived without dramatic upside surprises. Annual headline and core inflation rates edged down in line with expectations, even as the month-on-month increase in core prices came in a touch hotter than analysts had forecast.
Interest-rate markets reacted by trimming the odds of a Federal Reserve rate hike at the next meeting to just below 50%. Short-duration Treasuries found some relief, but that did not prevent the government from selling 10-year debt at the highest yield in almost 20 years in yesterday's auction. The yield curve between two- and 30-year maturities steepened modestly.
That calm is limited, however. The next installment of the inflation picture arrives today in the form of the producer price report, which includes items that feature in the Fed's favored personal consumption expenditures (PCE) gauge - notably airfares. Current projections indicate both core and headline PCE inflation remained north of 3% in July. Policymakers will also be watching the rebound in oil prices since July, which could push August inflation readings higher. The Fed will have August's CPI before its September meeting, adding another element of uncertainty to rate-setting deliberations.
Energy and global price pressures
On the energy front, Brent crude was trading just below $90 per barrel on Thursday, down slightly from the week's peaks but still elevated amid continuing tensions in the Gulf. Those higher oil prices represent a potential transitory source of inflation for upcoming monthly readings.
Elsewhere, Japan's wholesale inflation remained elevated in July, with year-on-year rates still above 7% driven largely by sizeable energy price gains. Monthly wholesale inflation was weaker than anticipated, leaving questions over how the data will influence the Bank of Japan's policy calculus.
Market tone and corporate drivers
Global markets have slid into the usual August lull, with major equity indexes little changed overall. Wall Street remains close to record levels after a surge in AI-related company results earlier in the week, led by gains in firms focused on artificial-intelligence infrastructure and hardware.
Chart of the day - U.K. growth snapshot
A notable outlier in the latest national accounts: Britain recorded a surprisingly strong 0.4% expansion in the second quarter, aided by a jump in June activity as World Cup-related spending boosted demand. Although that pace was slightly cooler than the first quarter, the U.K. is recording a 2.0% annualized growth rate for the first half of the year and has now posted the fastest growth among G7 economies for two quarters running.
While the second half of the year typically slows, the stronger first-half performance complicates narratives of a broadly struggling U.K. economy and could provide a policy tailwind for the new prime minister heading into the government budget plan scheduled for October.
Events to watch today
- U.S. July producer price index (PPI) - 8:30 a.m. EDT
- U.S. weekly jobless claims - 8:30 a.m. EDT
- U.S. 30-year Treasury auction - 1:00 p.m. EDT
- Speeches by Cleveland Fed official Beth Hammack and Richmond Fed official Thomas Barkin
Market participants will be parsing today's PPI release closely because of its implications for the PCE measure that the Fed prioritizes. With core and headline PCE both expected to remain above 3% in July and oil showing signs of rebounding, the path of inflation remains a central consideration for fixed-income markets and monetary policymakers.