It has been a quiet trading week with no meetings for central banks while big data such as the US CPI inflation data and a preliminary estimate of Q2 GDP numbers in the UK, alongside business investment, trade balance, manufacturing, and construction output were in the spotlight.
US Inflation at 13-year highs
The inflation in the US consumer price rate stabilized at 5.4% in July 2021, unchanged from the previous month’s 13-year high and slightly above market expectations of 5.3%. The inflationary pressures reflect the effect caused by the coronavirus crisis, the re-opening of the economy, and continued supply constraints.
The main contributor to rising prices was the food price index that rose by 3.4% vs 2.4%. On a monthly basis, consumer prices rose 0.5% in July, the least since February’s 0.4% rise.
The core index, excluding the volatile food and energy prices, rose 0.3% on a monthly basis and 4.3% annually.
Inflation data are a key factor in determining the policy path for the Federal Reserve who keep insisting that inflationary pressures are reflecting transitory effects. Now that inflation is stabilizing above 5% well above the Federal Reserve’s target of about 2%, market participants are watching closely to see how persistent the pressures are, especially before September’s meeting as markets are pricing possible tapering decisions.
Separate data showed that the number of unemployment claims dropped for a third straight week to 375K through the week ending August 7th, and is expected to fall further in the coming weeks. The number of people claiming unemployment benefits is getting closer to a pandemic low of 368K reached in June and adding to signs of a solid recovery in the US labor market despite the threats of the Delta spread.
UK Economy back to Recovery
The UK economy grew by 4.8% from April to June 2021, recovering from a 1.6% contraction in the previous quarter, with rebounding activity and demand following the easing of coronavirus restrictions.
Household consumption jumped 7.3% supporting the overall recovery in GDP and public spending advanced 6.1%. Meanwhile, fixed investment contracted by 0.5% despite the increase in business investment, while net trade contributed negatively to the GDP as imports rose more than exports.
Industrial production contracted in June by 0.7%, while manufacturing production rose by 0.2%.
The recovery is backed by the rapid pace of COVID-19 vaccinations which allowed the country to pursue its re-opening efforts, boosting consumption.
The Bank of England left policy unchanged during its August meeting, with policymakers reiterating that they do not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.
However, officials signaled some modest tightening of monetary policy over the next two years was likely to be necessary if the economy continues to improve. The central bank also said it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting proceeds and it would start considering selling stock of purchased assets when the rate reaches at least 1%. Markets are expected a possible hike interest rates by 2022.
Chinese Inflation near Year’s High
China’s annual inflation edged slightly down to 1.0% in July from 1.1% a month earlier. However, the reading came well above market consensus of 0.8%. Despite the fact that July’s reading is the lowest reading since April, the inflation rate is still hovering around this year’s high at 1.3% reached in May.
The Producer Price Index (PPI) also rose by 0.9% annually, from the previous reading at 8.8% and above market expectations at 8.6%.
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