US inflation came in hot, hot, hot! While US core CPI aligned with expectations, headline at 3.7% exceeded them.
Last Week’s Highlights
CPI came in hot, hot, hot. While US core CPI aligned with expectations, headline at 3.7% exceeded them. The details were far more hawkish, with core services ex. housing inflation accelerating (to 0.6% MoM), the third month in a row. The Cleveland Fed median price index also ticked higher.
Consequently, market-based expectations of a hike in December rose from 30% to 40%, while stocks struggled (Chart 2).
Sticking with the US… We had several central bank speakers last week. Vice Chair Jefferson (voter, dove), Logan (voter, hawk), and Waller (voter, hawk) hinted at a pause in November to offset the impact of higher yields and assess how the economy was coping with them. Daly (non-voter, dove) also said she could see the long-term dot rising to 3%. The market is now reflecting on the importance of a hot CPI print against the potential tightening achieved via higher long-end yields.
Swedish economy shrunk in August. GDP growth fell by 0.2 MoM in August after growing by 0.9% in July. Rising imports drove the decline. Household consumption was relatively robust, growing 0.5% MoM, while industrial production grew 2.4%. Despite negative growth overall, the Swedish economy has held up better than most expected given the economy’s high sensitivity to rising interest rates.
UK economy grew in line with expectations. The British economy grew 0.2% MoM in August driven by higher services output, which grew 0.4% following a fall of 0.6% in July. Construction output contracted 0.5% driven by a decrease in new work, as heavy rainfall and lower-than-average temperatures delayed projects.
US oil stocks rose 10mn barrels. EIA inventory data leaned bearish for oil as commercial crude stocks rose 10mn barrels last week, reversing five weeks of draws. A drop in net exports drove the large increase, while refinery utilisation also fell as maintenance season begins. Gasoline stocks fell 1.3mn barrels, reversing part of the 6.4mn monster build last week. Meanwhile, gasoline demand rose from 8mn b/d to 8.6mn as we expected. An increase in net imports may be bearish for US crude stocks, but it is neutral when looking more holistically (as it means less crude supply abroad).
Despite the bearish inventory data, Brent rose sharply on Friday to $89 as markets looked to buy oil ahead of the weekend in case tensions between Israel and Hamas escalated. The attack on the Finnish gas pipeline also sent natural gas prices soaring as it further pressured Europe ahead of a potentially cold winter (Charts 1 and 5).
What to Watch
Is the US consumer still spending? Dominique agrees with the consensus of -10bp MoM for the control group used to compute consumption in the national accounts. That said, retail sales include only goods and restaurant spending, meaning a weak number may not necessarily translate to a weak consumption number overall. However, restaurant spending is the best indicator of the consumer’s overall ability to spend, so it will be key to watch.
Upside risks to UK inflation on Wednesday. The consensus reading for headline is +6.5% YoY, while for core it is split between +6.0% and +5.9% YoY (+0.4% and +0.3% MoM). Services are prone to surprise single-sector MoM jumps. Last month saw downward surprises in core inflation, which could reverse, while higher diesel prices could add to headline inflation.
What should we expect from Putin and Xi’s meeting? China will host the third Belt and Road Forum next week on Wednesday and Thursday. Russian President Putin and Chinese President Xi are expected to hold talks. We expect Xi to avoid the West’s red lines on the Ukraine war. Talks will likely focus on more energy sales to China, yuan settlement, and Chinese FDI.
Regional bank earnings to hint at bank health. JPM and Citi already reported last week with strong beats. More importantly, they continued to show the consumer remains strong, while provisions for loan losses remain low. This week, we start seeing the earnings reports of regional banks such as Citizens Financial, US Bancorp, and Huntington Bancshares.
The Week Ahead: Watch Dominique and Andrew the Wednesday CPI print, why the Fed is pushing back on a potential November hike, and what investors should look out for from the 11 public Fed speakers next week.
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