Agencies
Federal Reserve Chair Jerome Powell testified that inflation has significantly decreased from its peak two years ago, but more progress is needed before cutting interest rates. Powell emphasized the need for confidence that inflation is moving sustainably toward the 2 percent target.
While recent inflation data shows modest progress, the Fed remains cautious. Powell’s testimony before the Senate Banking Committee highlighted the balance the Fed seeks between stabilizing prices and maximizing employment, and that key decisions are being taken without considering political pressure.
"Our undertaking is to make decisions when and as they need to be made, based on the data, the incoming data, the evolving outlook and the balance of risks, and not in consideration of other factors, and that would include political factors” Powell said.
The Fed’s key interest rate remains high, with officials projecting a single rate cut this year, down from previous forecasts. Powell also noted that the job market is strong but not overheated, with recent signs of cooling.
The Fed is also monitoring consumer spending, which has shown signs of weakening, adding complexity to their decision-making on interest rates.
The Consumer Price Index (CPI) report for June showed inflation slowing down more than anticipated, coming in at 3 percent annually from 3.3 percent in May and 3.1 percent forecasted. On a monthly basis, inflation fell 0.1 percent whereas it was expected that it would rise 0.1 percent.
This marks the first monthly decline of inflation since the COVID pandemic in May 2020 driven by a fall in energy prices as well as new and used cars. Core inflation, which excludes volatile energy and food components, rose 0.1 percent on the month and 3.3 percent annually, a three-year low.
On the other hand, the Producer Price Index (PPI) rose 2.6 percent annually versus 2.2 percent previously and 2.3 percent forecasted.
Annual core PPI increased 3 percent versus 2.5 percent forecasted and 2.3 percent previously and jumped 0.4 percent on the month while it was expected to rise 0.2 percent.
The higher-than-expected PPI print conflicts with the CPI report released prior, leaving traders scrambling to gauge the direction of inflation and monetary policy. Markets are pricing in three rate cuts by year-end totaling 75 bps worth of reductions beginning in September’s meeting.
The University of Michigan’s preliminary reading of consumer sentiment showed continued frustration on the inflation front, with the print coming in at 66.0 versus 68.2 in June and 68.5 forecasted.
Nearly half of consumers are frustrated about the impact of high inflation, despite the survey demonstrating that one-year and the five-year inflation expectations fell to 2.9 percent from 3.0 percent previously.
The current economic conditions index declined again coming in at 64.1 from 65.9 the previous month and reaching a 19-month low.
The sour sentiment comes amid recent readings that show progress on the consumer price inflation front however an easing labor market as well as squeezed budgets in households due to elevated interest rates could be playing a role in the weakening sentiment. The US dollar index closed the week at 104.093.
The second round of parliamentary elections in France saw a surprise victory for the left-wing coalition.
The leftist alliance won 198 seats compared to 169 seats for President Emmanuel Macron’s party, and 143 seats for the far-right National Rally party led by Marine Le Pen.
The result was a major blow for Le Pen’s party, who were projected to be first but ended up third in the elections, and centrist President Emmanuel Macron, who called for early elections and is set to deal with a heavily divided parliament made up of three factions with opposing outlooks on key policies. The EUR/USD currency pair closed the week at 1.0906.
The UK economy grew by 0.4 percent in May, exceeding expectations of a 0.2 percent increase and is a welcome sign after April’s reading came in flat. The growth in GDP was driven mainly by the services sector, which saw a 0.3 percent increase in output. Additionally, both production output and construction grew on the month at 0.2 percent and 1.9 percent respectively.
The sterling rose to its highest level in nearly a year, as a combination of higher economic growth in the UK and lower than expected US inflation data boosted sentiment. Moreover, the strong growth in May suggests that quarterly GDP growth could come in more than the Bank of England’s forecasts, potentially complicating the decision of an interest rate cut.
Markets are split on the BoE’s early August meeting, with traders slightly favoring the central bank to hold rates at 51 percent as opposed to delivering a cut at 49 percent. The GBP/USD currency pair closed the week at 1.2992.
China’s consumer price inflation rate continued to slow in June 2024, dropping to 0.2 percent year-on-year, which was lower than market forecasts.
This marked the fifth consecutive month of consumer price increases, but it was also the weakest inflation reading since March. Food prices fell for the twelfth month in a row, despite a rise in pork prices during a key holiday, the Dragon Boat Festival. On the other hand, non-food inflation remained stable, with price increases seen in sectors like clothing, housing, healthcare, and education. The cost of transportation, however, continued to decline. Overall, China’s inflation is subdued, posing challenges for the country’s economic recovery. The USD/CNY currency pair closed the week at 7.2500.
The Reserve Bank of New Zealand maintained the cash rate at 5.5 percent, meeting market expectations.