Modestly weaker CPI helps maintain 2024 easing pricing

USD: Inflation data underlines favourable outlook  

The US dollar weakened modestly yesterday which in our view is consistent with the fact that the CPI data yesterday reinforced the prospect of monetary easing in 2024. With 125bps is easing priced into the fed funds futures strip it is important that incoming data effectively endorses that pricing. Otherwise, the removal of that extent of easing would lift short-term yields and spark a more notable recovery for the US dollar. Post-CPI market moves have not been large in part because of the rate cuts already priced and in part after the dollar weakened ahead of the CPI release.

But we certainly saw enough in this CPI report to remain of the view that inflation is set to continue slowly drifting lower and backs up our view that it is likely at this stage that the Fed has finished its tightening cycle. Another core CPI m/m print of 0.2% was in fact close to 0.1% for the second consecutive month (0.16% after 0.158% in June) while a more sectors covered in CPI were weaker. Rental inflation was again the culprit for a lot of the overall gain in CPI in July. The lag between actual rental price declines and it being reported in CPI seems very long but nonetheless, rental CPI is set to drop sharply and that will be a very considerable disinflationary force once it starts to unfold.

 

SUPERCORE CPI – 3MTH & 6MTH ANNUALISED RATES TRENDING WEAKER

Source: Bloomberg, Macrobond & MUFG GMR

The supercore measure was another positive in our view. Some market participants cited this aspect as a negative because the YoY supercore rate picked up from 4.01% to 4.15%. However, it is the m/m that is key here and it came in at 0.19% following an unchanged m/m print in June. The 3mth annualised rate was 1.7% in July, up from 1.4% in June but below 2.0% for two consecutive months. The 6mth annualised rate slowed from 3.3% to 2.9%, the lowest level since March 2021. Furthermore, total CPI excluding shelter was unchanged in July following a 0.1% increase in June and a 0.1% drop in May. On an annual basis the July gain was just 1.2%. Core CPI excluding shelter fell from 2.8% to 2.6%. So really bar the continued resilience in rental inflation, this report contained plenty of evidence of continued easing inflationary pressures.

So we suspect this data will just reinforce the current range trading for the dollar. We have in fact oscillated mostly between 100-104 in DXY since April and this CPI report is enough to maintain current market pricing on Fed rate cuts next year. That will limit the upside for the dollar while weak growth abroad will likely limit US dollar downside scope for now as well.

JAPAN TOURISM TRAVEL SERVICES SURPLUS HAS SURGED TO NEW HIGHS

Source: Macrobond & Bloomberg

JPY: China tourism restriction easing JPY supportive

Yesterday China announced the relaxation of restrictions on group travel to 78 countries with immediate effect which will result in a notable pick-up in China tourism travel. The countries that will benefit are widespread including Japan, South Korea, Australia, Germany, the UK and the US. Tourism-related stocks, including airlines outperformed notably yesterday in countries that benefitted most from China tourism before the pandemic. Japan has been a favoured destination for China tourists and will benefit notably from this announcement over time. The recovery in tourism has already seen an increase in tourism-related services inflows on the services side of the trade account and that will improve further over the coming year. The above chart shows ‘Tourism Related Travel Services’ from the Balance of Payments data and in April this hit a new record surplus following the sharp recovery that started in October last year when Japan eased its own restrictions. Earlier this week we highlighted the fact that the merchandise trade balance had returned to surplus for the first time since 2021 and now this component will help to lift inflows on the services side of the balance of payments.

The component remains relatively small but relative to the period during covid lockdown, the turnaround is still significant and on an annualised basis this implies an increased surplus from JPY 180bn during covid to JPY 3.6trn at the current levels – however, the China announcement will mean a larger surplus going forward. This is more the case given the Japanese government are very focused on boosting tourism, ensuring to take advantage of the weakness of the yen.

Like what we said earlier this week, the flow data is clearly turning more supportive for the yen and while in of itself it is not enough to argue a turn in JPY direction, once we have more compelling evidence of a slowdown in the US and the markets price a more imminent turn in Fed policy, a turn in the JPY depreciation trend will unfold and the balance of payments data will back up that JPY strength move.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
CH	08:00	M2 Money Stock (YoY)	--	--	11.3%	!
CH	08:00	New Loans	--	--	3,050.0B	!!
CH	08:00	Outstanding Loan Growth (YoY)	--	--	11.3%	!
CH	08:00	Chinese Total Social Financing	--	--	4,220.0B	!
US	09:00	IEA Monthly Report	--	--	--	!!
US	13:30	Core PPI (YoY)	Jul	2.3%	2.4%	!!
US	13:30	Core PPI (MoM)	Jul	0.2%	0.1%	!!!
US	13:30	PPI ex. Food/Energy/Transport (MoM)	Jul	0.1%	0.1%	!
US	13:30	PPI (MoM)	Jul	0.2%	0.1%	!!
US	13:30	PPI ex. Food/Energy/Transport (YoY)	Jul	--	2.6%	!
US	13:30	PPI (YoY)	Jul	0.7%	0.1%	!
UK	14:00	NIESR GDP Estimate	--	--	0.0%	!!
GE	14:00	German Current Account Balance n.s.a	Jun	--	8.9B	!
US	15:00	Michigan 5-Year Inflation Expectations	Aug	3.0%	3.0%	!!!
US	15:00	Michigan Consumer Expectations	Aug	68.0	68.3	!!
US	15:00	Michigan Consumer Sentiment	Aug	71.0	71.6	!!
US	15:00	Michigan Current Conditions	Aug	76.8	76.6	!
US	15:00	Michigan Inflation Expectations	Aug	3.8%	3.4%	!!!

 

Source: Bloomberg