The July PCE price deflators, the Fed’s preferred inflation gauge, are on tap

Markets

Oil prices are falling for a third day (including this morning) straight. A barrel of Brent is now trading at around $86.7, the lowest in two weeks. The downleg started on Monday, when USTS Bessent spelt out (some) details of his Operation Economic Outcast. That revealed a US preference for economic pressure rather than military re-escalation. The same conclusion was drawn from a New York Times report yesterday which said that the US is preparing to send diplomats back to the Middle East. That indicates the US is not planning to resume strikes on Iran. And finally, a joint statement by Iran and Oman in late US trading yesterday noted that the countries have discussed an interim framework aimed at reopening the Hormuz Strait. While highly uncertain and dependent on the response of the US (which isn’t involved in the talks), the hope is that such a deal could create a path for Iran and the US to return to the earlier MoU. Falling energy prices, which have spread to gas too, ease some of the pressure on core bonds. US rates yesterday fell between 5.9 and 7 bps with the belly outperforming the wings. The European swap yield curve bull steepened with net daily changes varying from -2.2 to -5.9 bps. Currencies treaded water in most cases. EUR/USD moved sideways in the upper 1.16-1.17 half. DXY and USD/JPY barely budged. EUR/GBP stranded near 0.855 in static, directionless trading. Lower energy prices supported risk sentiment somewhat. A sell-off in the chips/semiconductor sector eased, leading the Nasdaq to a 0.66%. Tech giant Nvidia helped out by snapping a 7-day losing streak. The company’s after-market earnings release today will serve as a key gauge for the broader sector and will be watched as closely as ever.

The traditional economic data calendar deserves some attention too. The July PCE price deflators, the Fed’s preferred inflation gauge, are on tap. The headline figure is expected to ease from 3.7% to 3.6%. Core PCE would match June’s 3.3%. With the economy and labour market in a solid state, Fed policymakers are particularly focused on the price stability leg of their mandate. Boston Fed president Collins (non-voter) may have captured risks from a market point of view best. She said that anything that does not show further disinflation would make it appropriate to tighten policy soon. The market implied probability for a September Fed hike currently stands at 40%. Fed chair Warsh’s highly anticipated speech at Jackon Hole this Friday may temper any directional bets though. For the ECB meanwhile, another hike is all but priced in for next month. Board member Schnabel is adding some fuel to the fire this morning, saying that rates must rise further on inflation and second-round effect risks that may put the central bank behind the curve if not addressed early on. Schnabel pointed out that the economy is gaining further momentum while inflation is likely to exceed the 2% target for an extended period.

News and views

Australian inflation accelerated more than expected in July. Headline CPI increased by 1% M/M with the Y/Y-figure slowing from 3.8% to 3.5% (vs 3.3% consensus). On a monthly basis, automotive fuel prices rose 7.5% in July after falling for three months in a row driven by higher world oil prices and partial unwinding of the federal government’s fuel excise relief measures. The central bank’s preferred core CPI measure (trimmed mean) rose by 0.5% M/M to keep the Y/Y-comparison unchanged at 3.6% (vs 3.5% consensus). Today’s hotter CPI print keeps the debate on the need for a potential final RBA rate hike alive. Markets now fully discount such move by the February 2027 policy meeting. The Aussie dollar extends this summer’s run against a weak USD with AUD/USD about to hit the 0.72-mark for the first time since May.

Canada yesterday announced retaliatory measures against the US after the White House slapped new import duties on $20bn of Canadian goods this weekend. The dollar-for-dollar counter-tariffs of up to 50% target around 700 US products, ranging from dairy over seafood to washers and dryers and are equal to around 6% of US exports to Canada last year. Tariffs for US steel and aluminum will double from 25% to 50%. Officials indicate that the Trump administration is already discussing additional trade penalties against Canada with the dispute between the two nations at risk of spiraling out of control.

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