As another trading day dawns, markets look ever more optimistic that the worst is behind the economy, in both growth and inflation terms. Global equity indices are up and government bond yields are down after the UK reported a sharp decline in inflation pressures, measures of expected volatility are plumbing post-pandemic lows, and the dollar is gaining against most of its peers as rate differentials tilt back in its favour.
Inflation fell more quickly than expected in the UK last month, easing pressure on the Bank of England and helping take some air out of the pound. Numbers released by the Office for National Statistics this morning showed headline annual price growth slowing to 7.9 percent in June from 8.7 percent in May, with the core measure slipping to 6.9 percent from 7.1. Traders reduced bets on the Bank Rate exceeding 6 percent this year, gilts and equities surged, and the pound slipped back below the 1.30 mark against the dollar.
Eurostat said core inflation accelerated more than it initially believed in June. With food and energy components excluded, consumer prices rose 5.5 percent in the month from a year earlier, higher than the preliminary 5.4 percent estimate, and up from the 5.3-percent pace recorded in May. The euro rose slightly on the revision, but remains weaker after yesterday’s Bloomberg interviews with the typically-hawkish European Central Bank Governing Council member Klaas Knot, who sounded more cautious on the need for rate hikes beyond next week’s meeting. “For July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty,” he said. “From July onward I think we have to carefully watch what the data tells us on the distribution of risks surrounding the baseline.”
The Canadian dollar is clinging to modest gains achieved during yesterday’s session, but remains restrained well above the 1.31 barrier that has repeatedly protected the 1.30 mark this year. Headline inflation missed expectations, coming in at 2.8 percent year-over-year against a 3-percent consensus. Yet an average of the trim and median core rates topped forecasts, landing at 3.8 percent, slightly above the 2.65-percent anticipated by economists, and essentially unchanged relative to levels that have prevailed for more than eight months. We think this will likely keep the Bank of Canada on a rhetorically-hawkish footing, even as it stays on the sidelines for many months to come.
The yen remains on the defensive after Bank of Japan Governor Kazuo Ueda appeared to suggest that the “premise” underlying monetary policy settings hadn’t changed, negating the need for big adjustments in the short term. In comments yesterday morning, Ueda noted that inflation remained far from sustainably reaching the central bank’s objectives, saying “We check the premise at every policy meeting and I would like to say that, unless the premise is shifted, the whole story will remain unchanged”. Ahead of the comments, market participants had begun raising the implied odds on a deeper policy shift at next week’s meeting, but those have now subsided, leaving the exchange rate caught between ongoing carry funding activity and the ever-present threat of official currency intervention.
Still ahead today: almost nothing. The annual pace of US housing starts is seen falling to 1.48 million in June from 1.63 million a month earlier, and weekly energy inventories will be released, but neither is likely to move markets. With the Federal Reserve in its blackout period, there are no central bank appearances scheduled. Tomorrow is expected to bring a modest increase in weekly jobless claims from the US, and Canada will report retail sales for May – along with an advance estimate for June – on Friday.