consumer prices

The eurozone’s improving inflation outlook could leave the ECB behind the curve Slowly but surely, the inflation outlook for the eurozone is improving. Headline inflation is normalising, but persistent core inflation is complicating things. While this remains the case, the European Central Bank will continue hiking interest rates – but for how long?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply and is widely expected to continue to fall over the months ahead. The decline in natural gas prices has been remarkable over recent months, and while it would be naïve to expect the energy crisis to be completely over, this will result in declining consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there's more to come in terms of a downward impact on inflation. For food, the same holds true. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slowing increases. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Historical relationships and post-pandemic shifts As headline inflation looks set to slow down further – at least in the absence of any new energy price shocks – the question is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 80s are not available for many countries – but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 70s and 80s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   During previous supply-side shocks, core inflation did not remain elevated for much longer than headline inflation

The Polish economy should reach a bottom in 1H23 but recovery in 2H23 could be sluggish as the main growth engine from last year (consumption) will improve only gradually with lower CPI and some election spending. Net exports should be the main growth driver depending on uncertain foreign demand. CPI peaked in February at 18.4%YoY but should fall to single digits in 3Q23 and 2024. July’s NBP projection is likely to bring a lower CPI trajectory and the NBP may provide a single cut in 2H23 (50% possibility), also referring to strong PLN. We see risk of persistently high core CPI at c.5% in 2024- 25. To achieve the 2.5% target, Poland needs a paradigm shift in policy, ie, nominal wages growth below 5%YoY, less consumption and more investment. PLN is no longer undervalued; we still see some appreciation. POLGBs curve may keep steepening due to rate cut expectations driving the short end and risk of spending affecting the long end, both from the ruling and opposition parties.   Forecast summary   GDP composition (%YoY)   Macro digest Economic growth was choppy and uneven in 2022 amid energy and war shocks, but the Polish economy managed to expand by a hefty 5.1% even though economic conditions deteriorated in the second half of the year. With wages failing to catch up with double-digit inflation, real disposable incomes of households deteriorated, weighing down on consumption. Consumption contracted in 4Q22 and 1Q23 in annual trends and is projected to remain weak most of 2023.   At the same time, investment should continue expanding on the back of outlays by large firms and public infrastructure and military spending. 1Q23 brought a contraction in annual GDP (-0.3%), but it was shallower than expected. In 2023, GDP growth is projected at 1.2% as an improving foreign trade balance (subdued imports) will more than compensate for weak domestic demand exacerbated by destocking.   Real GDP (PLNbn, 2015 prices, SA)   Consumer prices jumped by 14.4% in 2022 and average CPI is expected to remain double-digit in 2023, but inflation has passed the peak. The downward trend in the headline CPI is clear and core inflation started slower sequential growth. The strong disinflationary trends abroad (lower commodity prices, GVC in pre-pandemic conditions) and PLN firming, improved the outlook for core inflation decline, but it will moderate visibly lower than headline consumer inflation. Still, some policymakers flag a cut in NBP rates in late2023. We still see risks of inflation anchoring above the upper bound over the medium term (tight labour market, wage pressure, fiscal expansion).   As a result, the return of CPI to the NBP target of 2.5% is likely to be a long process. Nonetheless, we assess the odds of an NBP rate cut this year at nearly 50% given policy guidance from the NBP governor Glapiński, who said a rate cut is possible, provided inflation falls below 10% YoY, which we see in September (to be released at the beginning of October).    Change in inventories contribution to YoY GDP (ppt)   General elections in October 2023 have led to a series of fiscal pledges by the government. It has announced: a new permanent spending from 2024 (0.7% of GDP) and 0.6% of GDP one-off spending for 2023 (and 0.7% of GDP higher central deficit). The opposition joined in and declared additional fiscal spending if it gained power (2.4% of GDP).   At the same time, the Recovery and Resilience funds for Poland remain frozen and any breakthrough in the conflict over the rule of law between Warsaw and Brussels is unlikely before the elections in Poland. Public debt is moderate by EU standards (below 50%) but Poland has a high structural deficit, foreign investors are eager to purchase Polish Eurobonds, unlike POLGBs, but high liquidity of the domestic banks ensures strong demand for POLGBs.   In such an environment, public borrowing is not a challenge for authorities, at least not over the short to medium term.     

Asia Morning Bites The RBA decision will be the main data release for the day as the US takes a holiday.   Global Macro and Markets Global markets:  Not surprisingly, it was a fairly moribund start to the week for US stocks ahead of today’s US holiday.  Both the NASDAQ and S&P 500 made small gains. There was more action on Chinese bourses, where the Hang Seng rose 2.06% and the CSI 300 rose 1.31%. US Treasury yields continued to rise with 2Y yields up a further 4bp but 10Y yields up just 1.8bp. EURUSD is largely unchanged at 1.0914. The AUD is looking a little stronger at 0.6675 ahead of the RBA later today (we expect no change from them, though the market is split).  Cable was little changed, but the JPY lost further ground rising to 144.64. In Asian Markets, the KRW and THB made some gains, but it was a lacklustre day for most currency pairs.   G-7 macro:  The US Manufacturing ISM index weakened further to 46.0 from 46.9, and the employment index dipped into contraction territory, falling from 51.4 to 48.1. New orders were slightly less bad at 45.6, up from 42.6, but still in contraction territory. The equivalent manufacturing PMI index produced by S&P also registered 46.0, though was flat from the previous month. US construction data was stronger than expected, rising 0.9% MoM, though there were a lot of downward revisions. Apart from German trade data, it is quiet for Macro today in the G-7.   Australia:  The RBA decision today has the market split. Of 32 economists surveyed by Bloomberg, 13 expect a rise of 25bp to 4.35%, while 19 (including ourselves) expect no change to the current 4.1% cash rate target. The main reasons for our decision are as follows: The RBA hiked in June, and although the data has been mixed, back-to-back hikes seem excessive with rates already at an elevated level. Moreover, the run of recent inflation data has been far more benign than was expected, and if last month’s finely balanced decision was pushed over the edge by higher-than-expected inflation, this month’s decision should result in no change by the same logic. See this note on the latest CPI data for more on this. Finally, there will be much better occasions for the RBA to hike in the months ahead if that remains necessary. September will be one of those, as the RBA can assess the impact of large electricity tariff increases which are due in July, and should be visible in CPI data by September. Also, favourable base effects drop out after July's CPI release for several months, so it is not inconceivable that we see some backing up of inflation over the third quarter before it dips again into the year-end.   South Korea: Consumer prices rose 2.7% YoY in June, slowing for a fifth month (vs 3.3% in May, 2.8% market consensus) as gasoline (-23.8%) and diesel (-35.2%) prices limited overall price increases. Excluding agricultural products and oils, core inflation also slowed to 4.1% from 4.3% in May. We believe that inflation will stay in the 2% range throughout the year, there will be some ups and downs, but inflation probably won’t return above 3%. KEPCO raised power bills from the middle of May leading utility fees to rise sharply (25.9%), but we don’t expect additional fee hikes throughout this year due to falling global commodity prices. Also, rent prices marked five monthly drops in month-on-month comparisons, and the declines are gradually increasing each month. As a result, we think that service prices will come down further in the coming months. Today’s data support our view that the Bank of Korea (BoK) will continue to stay on hold.  Now, the question is the timing of the first rate cut. We have pencilled in a 25bp cut in October as inflation is expected to head towards 2% while the economic recovery remains sluggish. The BoK may be concerned that rate cuts could cause a rebound of household borrowing, along with the recent easing of mortgage measures. At the same time, rising delinquency rates and default rates will also be a concern for the BoK as strict credit conditions have increased the burden on households.     What to look out for: RBA meeting South Korea CPI inflation (4 July) Australia RBA meeting (4 July) Japan Jibun PMI services (5 July) Philippines CPI inflation (5 July) China Caixin PMI services (5 July) Thailand CPI inflation (5 July) Singapore retail sales (5 July) US factory orders and durable goods (5 July) FOMC minutes (6 July) Australia trade (6 July) Malaysia BNM meeting (6 July) Taiwan CPI inflation (6 July) US ADP employment, initial jobless claims, trade balance, ISM services (6 July) South Korea BOP balance (7 July) Taiwan trade (7 July) US NFP (7 July)

  The disinflationary trend in the eurozone has started and should gain more momentum after the summer. It will take a while but core inflation should follow suit as well.   Slowly but surely, the inflation outlook for the eurozone is improving. Base effects as well as fading supply chain frictions and lower energy prices have and will continue to push down headline inflation in the coming months – a drop that the European Central Bank deserves very little credit for orchestrating. With headline inflation gradually normalising, the big question is how strong the inflation inertia will be. As long as core inflation remains stubbornly high, the ECB will continue hiking interest rates. How long could this be?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply, which is widely expected to continue over the months ahead. The decline in natural gas prices has been remarkable over recent months and while it would be naïve to expect the energy crisis to be over, this will result in falling consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there will be more to come in terms of the downward impact on inflation. The same holds true for food. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slow. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Headline inflation – at least in the absence of any new energy price shocks – looks set to slow down further, but the main question now is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 1980s are not available for many countries, but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 1970s and 1980s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices over the coming months.      

Chinese deflation Asia began the trading week digesting the news of a softer-than-expected NFP read, faster-than-expected wages growth in the US, combined with deflation in Chinese consumer and producer prices. Lower job additions came as a relief for Fed watchers on Friday, but the wages grew faster than expected, and the unemployment rate fell slightly to 3.6%. All in all, the US jobs data was still hot, and backed the Federal Reserve's (Fed) campaign of policy tightening with further rate hikes. This being said, the US 2-year yield slipped below 5%, the 10-year yield consolidated above 4%, as the US dollar index was sold off aggressively below the 50 and 100-DMAs. Due Wednesday, US inflation is expected to have fallen from 4% to around 3% in June, with a possibly uptick in the monthly data. But core inflation could prove stickier at around the 5% mark. In all cases, softening, and ideally softer-than-expected inflation figures carry the potential of pushing the Fed hawks back. That could give quick support to the US stocks which ended the first week of July, and the first week of H2, in the negative.   By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank

Chinese deflation The Chinese inflation came in unexpectedly soft in June. Consumer prices fell 0.2% m-o-m, as the decline in producer prices accelerated more than expected to 5.4% y-o-y. The Chinese efforts to boost economy and inflation are not working. That's maybe why the Chinese regulators chose to ease pressure on their tech giants. Last Friday, the regulators finally ended a yearlong inspection of Alibaba's Ant Group and said that the tech industry will see 'normalized supervision'. Alibaba shares jumped 8% in New York last Friday but would that be enough to bring investor confidence back is not sure yet. The morose Chinese inflation limited appetite in oil this morning in Asia, but the price of a barrel of crude rallied past the $73pb to the 100-DMA last Friday, as the fresh round of production cuts from Ryad and Moscow slowly but surely brought the oil bulls back to the battlefield as long-term supply worries started weighing on mood in the bears' camp. Trend and momentum indicators are now comfortably bullish, and hint that the rally could extend. The next natural target for the oil bulls is the 200-DMA, which stands near the $77pb level.  

First impressions can be deceiving. US non-agricultural employment rose by 209,000 in June fell short of the Bloomberg expert consensus forecast and was the weakest since December 2020. Moreover, the data for April and May were revised down by 110,000. Initially, the market perceived the report as weak, which led to a drop in Treasury bond yields and a rise in EUR/USD above 1.092. However, the devil is always in the details. In the lead-up to the report, investors were counting on strong numbers as private sector employment from ADP rose by nearly half a million people.   However, the actual non-farm payrolls turned out to be worse than that report by the largest amount since the beginning of 2022. This fact can be seen as a sign of a cooling labor market. Nevertheless, unemployment in June dropped from 3.7% to 3.6%. As long as it does not increase, we can forget about a recession in the US economy. In addition, the average wage increased faster than expected, so it's still too early for the Federal Reserve to relax.     The employment report for the US private sector turned out to be mixed. It reduced the probability of a rate hike to 5.75% in 2023 from 41% to 36%, which worsened the position of the US dollar against the main world currencies. However, Deutsche Bank noted that only a figure of +100,000 or less for non-farm payrolls could change the worldview of FOMC officials and make them abandon their plans for two acts of monetary restriction this year. June employment data gave food for thought to both the "hawks" and "centrists" of the Fed, as well as the "bulls" and "bears" for EUR/USD.   Now, investors' attention is shifting to US inflation data and Fed Chair Jerome Powell's speech in Jackson Hole. Bloomberg experts expect consumer prices to slow in June from 4% to 3.1%, and core inflation from 5.3% to 5% year-on-year. CPI is moving so quickly towards the 2% target that it's as if Fed officials have not changed their minds. Could it be that this time the financial market will be right? And those who went against the Fed will make money? We'll see.     Not everyone agrees with this. ING notes that the minutes of the FOMC's June meeting set a very high bar for incoming data for the Bank to abandon its plans. The US labor market report is unlikely to have surpassed this bar. Core inflation continues to remain high, and the economy is firmly on its feet.   All this allows ING to predict the EUR/USD pair's fall towards 1.08 within the next week. Technically, on the daily chart, there is a battle for the fair value at 1.092. Closing above this level will allow you to buy on a breakout of resistance at 1.0935. This is where the upper band of the consolidation range within the "Spike and Ledge" pattern is located. On the contrary, if the 1.092 mark persists for the bears, we will sell the euro from $1.089.      

The British pound has strengthened its leadership in the G10 currency race thanks to the U.S. employment report. The increase of 209,000 jobs in June disappointed USD supporters, causing GBP/USD quotes to soar to the highest level since April 2022. However, it failed to consolidate at that level as the unemployment rate dropped to 3.6% and average wages accelerated to 4.4%, indicating that the Federal Reserve still has a lot of work ahead. The Bank of England also faces challenges. Wage growth in the United Kingdom is outpacing that of the United States. Bloomberg experts forecast a 7.1% increase in May.   The current values, along with sustained elevated inflation at 8.7%, are perceived by companies as a greater incentive for price increases than the BoE's optimistic forecasts of CPI slowdown. BoE Governor Andrew Bailey and his colleagues are determined to prevent inflation from solidifying at elevated levels, but their actions could lead to a recession. Indeed, the short-term market expects the repo rate to reach 6.5% by March 2024. Such a high borrowing cost could risk a recession. Additionally, the yield curve inversion signals an impending downturn.     At first glance, the pound is at a turning point: the projected 150 basis points increase in borrowing costs could trigger a GDP contraction. Markets generally perceive this negatively, as was the case with the U.S. dollar at the turn of 2022–2023, when its quotes were falling. However, it's important to remember that in any currency pair, there are two currencies. The current success of GBP/USD is only partially related to expectations of a repo rate increase to 6.5%.   It's also influenced by some weakening of the U.S. dollar against major global currencies. Some Forex experts believe that the most aggressive monetary restriction by the Federal Reserve in decades will eventually worsen the health of the U.S. economy. Meanwhile, Bloomberg experts predict a slowdown in U.S. consumer prices to 3.1% in June, causing the USD index to decline. The pound faces a test with the release of UK labor market data by July 14. Alongside the previously mentioned wage growth of 7.1%, Bloomberg experts forecast a slowdown in employment from +250,000 to +158,000.   According to Pantheon Macroeconomics, this change will not be sufficient to stop the Bank of England. The repo rate hike toward 6.5% will continue. Considering that markets were anticipating 5.3% a month ago, the pound's successes are logical.     In my opinion, investors have been somewhat excessive in selling the U.S. dollar based on mixed U.S. employment statistics. This vulnerability makes sterling positions vulnerable. Technically, on the daily GBP/USD chart, a reversal pattern like a Double Bottom may form, or an upward trend may resume. In the first case, we sell the pair on a breakthrough of the pivot level at 1.2785. In the second case, on the contrary, we buy it upon a new local high at 1.285.  

Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024. More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024.   Falling producer prices, but wages rise

Czech inflation back in single digits Inflation fell into single-digit territory for the first time since early 2022 and is the lowest in the CEE region. However, this will not be enough for the Czech National Bank to change its tone. Disinflation will slow next month. We do not expect the first cut until November.   Lowest inflation in the CEE region June consumer prices rose 0.34% month-on-month, which translated into a drop from 11.1% to 9.7% year-on-year. Inflation in the Czech Republic is the lowest since December 2021 and the country is now the first in the CEE region to have returned to single-digit territory. Prices were pushed up in June mainly by seasonal factors in recreation prices. Otherwise, we saw a steady rise across the consumer basket. Core inflation fell from 8.6% to 7.8% YoY with downside risk, according to our calculations. The CNB will release official numbers later today, as always. June inflation is four-tenths below the central bank's forecast, but this means a one-tenth reduction in the previous forecast deviation. Core inflation in the second quarter, by our calculations, surprised the central bank to the downside by two-tenths on average.   Contributions to year-on-year inflation (bp)     The CNB wants to see more before cutting rates Looking ahead, our fresh nowcast indicator points to July inflation falling to 8.6% YoY. The pace of disinflation should thus start to slow in line with our earlier expectations. Therefore, we think today's result will not be a game-changer and the current drop in inflation will not be enough for the CNB. Today's inflation number is the last before the central bank's August meeting, including a new forecast. We expect the CNB to wait to cut rates until the November meeting with the risk of postponement until the first quarter of next year.

Recent macroeconomic readings, including data on wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators offer crucial information about the depth of the potential recession and the future course of action for the Bank of England (BoE). To shed light on these important developments, we reached out to Nick Cawley, Senior Strategist at DailyFX, for his expert analysis.   The persistent challenge faced by the BoE is the backdrop of persistently high inflation, which currently stands at 8.7%, well above the central bank's target of 2%. Simultaneously, the UK's economic growth remains lackluster, prompting the BoE to carefully assess the delicate balance between raising the borrowing rate to control inflation and avoiding a recession.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?    Nick Cawley, Senior Strategist at DailyFX said: This week's economic data continue to highlight the problems that the Bank of England (BoE) face. Against a backdrop of relentlessly high inflation -  8.7% against the central bank's 2% target – and tepid UK growth, the BoE will need to gauge how much further they can lift the borrowing rate without sparking a recession.   The UK labor market remains robust, although cooling, with wage growth near record levels last seen during the pandemic period. This week's data show the UK unemployment rate rising to 4% in April, from a prior month's 3.8%, a small positive for the BoE in its fight against inflation, but soaring wage growth will likely keep pressure on consumer prices.    The latest Office for National Statistics (ONS) data show UK GDP flatlining in the three months to May, and indeed UK growth has been fairly stagnant since the start of 2022, not helped in part by rising borrowing. While the UK has avoided a technical recession so far, the likelihood that UK GDP may turn negative in the coming months is growing.   Recent inflation and jobs data all but guarantee that the UK central bank will hike the Bank Rate by a further 50 basis points to 5.50% at the next monetary policy meeting on August 3rd. The question then is what happens at the next meeting in the economic calendar on September 21. Will inflation fall sharply, as suggested on many occasions by BoE governor Andrew Bailey, or will data show the accumulative effects of prior rate hikes is taking effect? Add into the mixture UK mortgage costs are hitting multi-year highs and the BoE have a testing few months ahead. 

Poland’s inflation may fall to single digits in August but pace of disinflation to slow The final CPI print for June confirmed that inflation slowed to 11.5% year-on-year from 13.0% in May. We estimate that core CPI fell to 11.1% YoY from 11.5% a month prior. We see further deceleration ahead, likely allowing the MPC to cut rates in September and October.   Prices of goods rose by 11.4% YoY, and service prices by 11.7% YoY, compared with 13.3% and 12.3%, respectively, in the previous month. The biggest contributors to further disinflation in June were the deepening of the decline in fuel prices, the slowdown in the growth of prices of energy carriers, and the slightly slower growth of food prices compared to a month ago. These factors lowered the annual inflation rate in June by about 1.1 percentage points relative to May. For the second month in a row, consumer prices did not change significantly vs. the previous month. Core inflation declined markedly again and according to our estimates eased to about 11.1% YoY in June vs.11.5% in May. However, the months of rapid disinflation are behind us. Since the peak in February, CPI inflation has declined by nearly seven percentage points. We expect the disinflation process to continue, but its pace in the second half of the year will be slower, due to, among other things, a somewhat smaller drag from the reference base. In July, we may see a decline in prices relative to June and we may see the annual inflation rate at single-digit levels as early as August. The Monetary Policy Council has officially ended the cycle of interest rate hikes and is preparing for rate cuts, which, according to recent announcements by the National Bank of Poland President Adam Glapinski, may take place as early as after the summer holidays. This is also our baseline scenario, assuming rate cuts in September and October (both by 25bp). At the same time, the NBP's July projection indicates that even in the absence of interest rate changes, inflation will take a long time to return to target so the space for rate cuts seems limited. The market-priced scale of monetary easing may prove too aggressive.

The Federal Reserve has clearly won the fight against inflation. Victory is not inevitable, and its timing is not determined, but no one is talking about stagflation or hyperinflation at the moment. The markets responded favorably to the June consumer price index, fueling the dollar sell-off.   EUR/USD surged to 15-month highs, and this is far from the limit. Economists at Deutsche Bank expect EUR/USD to rise to 1.15 by Q4 2023, while Eurizon SLJ Capital suggests the 1.2 level. When the divergence in monetary policy between the European Central Bank and the Federal Reserve is accompanied by heightened global risk appetite and the decline of American exceptionalism, the US dollar is forced to raise the white flag. Currently, the gap between consumer and producer prices is at a record high. When such situations have occurred in the past, stock markets have risen. This has happened either in the very late stages of a recession or in the early stages of an upturn.        The Federal Reserve has clearly won the fight against inflation. Victory is not inevitable, and its timing is not determined, but no one is talking about stagflation or hyperinflation at the moment. The markets responded favorably to the June consumer price index, fueling the dollar sell-off. EUR/USD surged to 15-month highs, and this is far from the limit.   Economists at Deutsche Bank expect EUR/USD to rise to 1.15 by Q4 2023, while Eurizon SLJ Capital suggests the 1.2 level. When the divergence in monetary policy between the European Central Bank and the Federal Reserve is accompanied by heightened global risk appetite and the decline of American exceptionalism, the US dollar is forced to raise the white flag. Currently, the gap between consumer and producer prices is at a record high. When such situations have occurred in the past, stock markets have risen.   This has happened either in the very late stages of a recession or in the early stages of an upturn.      

Energy prices were the main driver of hospitality price rises over winter     Food and core goods inflation should start to come lower Away from services, the news is a bit brighter and headline inflation should dip back noticeably in Wednesday's figures. Last June we saw a near-10% spike in petrol/diesel prices; this year, they fell by 2.6% across the month by our estimates. That alone shaves 0.4pp off the annual CPI rate, and the result is that inflation is likely to hit 8.1% (down from 8.7%). Expect an even more pronounced decline in July’s numbers, as the 17% fall in average household electricity/gas bills wipes almost another full percentage point off the annual rate of inflation. The news on food prices should start to get better too. While still at a lofty 18%, food inflation does appear to have peaked and we've seen more noticeable early signs of slowing in the equivalent eurozone data. Given the UK's food inflation rate mirrored the eurozone until a few months ago, we don't see why this downward trend shouldn't also be replicated in Britain. That's because producer prices have been rising much less aggressively over recent months, and on a seasonally-adjusted basis, the change in prices over the past three months is compatible with what we typically saw before pre-2022 (see chart below). We doubt the divergence between producer and consumer prices will persist for much longer   Producer price inflation for food has slowed dramatically     Finally, we’ll also be watching ‘core goods inflation’ after various categories showed unexpected strength over recent months. April saw a surprise spike in vehicle prices, and we’ve also seen stickiness in clothing as well as alcohol/tobacco. The chart below shows that durable goods inflation has picked up again, despite inventory levels rising relative to sales among retailers/wholesalers. This isn’t unique to the UK, and we saw something similar in the US earlier this year. But we don’t expect this divergence between leading indicators and core goods inflation to continue. Base effects should also help disinflation among goods categories too over the next few months. We think this should help core inflation nudge fractionally lower in Wednesday’s data.   Durable goods inflation has picked up despite higher inventories/lower sales     Implications for the Bank of England Throw all of that together, and the result is that headline CPI should end up a tad below 7% in July (released in August). And a further downshift in energy inflation in October should take us to around 5% on our current projections. Core inflation will be stickier, ending the year north of 5%, and services is likely to be closer to 6%. If we’re right, then the Bank of England can probably get away with hiking slightly less than markets expect. Investors currently expect a peak for Bank Rate at 6.15%. Progress on services inflation should be enough to convince the committee to pause its hiking cycle in November, which would suggest a peak rate of either 5.50% or 5.75%. But given the tendency of inflation data to come in on the high side, we certainly shouldn't rule out a peak of 6% should services CPI fail to slow.  

Would we spot a bubble forming this time round? Looking back on it, the causes of the bubble and its subsequent crash are not as obvious as the convenient explanation I have just provided. Policy rates were not all that low relative to inflation, and the appreciation of the JPY following the Plaza Accord should have provided a substantial degree of financial tightening too. Broad money growth also was not so obviously out of control, at least relative to previous decades. It is hard to say we would definitely avoid doing something similar again now, even with the benefit of hindsight. That said, there is no arguing with the carnage that followed. Japan suffered a textbook case of genuine deflation – a term that is often misused, experiencing widespread and deep declines in the general price level, by which we mean not just consumer prices, but real assets, financial assets, and nominal wages.   Is there any sign of something similar in China? So let’s take a look at what is happening in China and pick apart the deflation argument. Firstly, let’s look for evidence of a bubble because if we are going to argue that it is about to burst, it needs to be there in the first place. In 1984, land prices for commercial property in Tokyo grew at a respectable 7.2% annual pace, The following year, this accelerated to 12.5%, and the year after that, to 48.2%. By 1987, commercial property land prices were rising at a 61.1% YoY pace. It was once suggested that the 1.5 square kilometres of land surrounding the Imperial Palace in Tokyo, were worth more than all the land in California. And whether or not that calculation stacks up (it sounds highly questionable), it shows just how extreme things had become. Yes, Japan had a bubble. If we use similar land price data for Beijing for both residential and commercial property, then there are certainly periods when prices accelerate sharply. The most recent period where this happened was between 2014 and 2017 when residential property prices accelerated at about a 20% annual pace. But it has slowed since and is showing small declines now.    Tokyo vs Beijing residential property prices    

Italy cushions windfall tax blow China deflation to spark stimulus efforts US five-year inflation breakeven nears peak set in April 2022 Yesterday, the euro took a big hit after Italian Premier Meloni’s cabinet approved a 40% levy on lenders’ extra profits.  Today was all about damage control as the Italian government had to tweak and ease up this crushing windfall tax on banks. The initial tax plan crushed the European banking sector, but that might see some relief now that the finance ministry clarified that the levy won’t surpass 0.1% of a firm’s assets and that banks who have delivered increased interest rates to depositors won’t be greatly impacted. The euro was steadying earlier, but a recovery of yesterday’s losses seems unlikely. The FX market appears to be struggling for major moves ahead of the US inflation report and that is somewhat surprising considering the deflationary numbers that came from China last night.  China saw both consumer and producer prices decline together for the first time since early in the pandemic.  China’s producer prices have been steadily dropping for 10th consecutive months, which should support disinflation hopes from most of the advanced economies.  China’s core CPI is still in positive territory, but that shouldn’t prevent officials from being a little bit more aggressive with stimulus. Even with China’s falling prices, some investors are still not yet confident that US inflation will come all the way down to the Fed’s target.  One of the long-term inflation gauges, the US five-year inflation breakeven remains elevated and close to the high made in April 2022.  Tomorrow’s inflation report could send this long-term measure above 2.5% or cool the steady rally that took hold since June.       Leading up to the US CPI report, EUR/USD has been consolidating between the 1.0920 and 1.1040 levels. Any significant upside surprises could support a stronger dollar, which could trigger a tentative break down below 1.0940 short-term support level.  An in-line inflation report could see the current trading range hold up, while a cooler-than-expected might support a rally towards the 1.1100 handle.      

Eurozone inflation stagnates ahead of ECB September meeting Inflation in the eurozone did not fall in August, which could tip the ECB in favour of a final 25bp hike at the governing council meeting in two weeks' time. Still, overall inflation dynamics remain relatively benign, and we still expect inflation to trend much lower at the end of the year. The eurozone inflation rate was stable at 5.3% in August, with core inflation also dropping to 5.3% (from 5.5% in July). Headline inflation was slightly higher than expectations due to energy price developments which increased by 3.2% month-on-month. This will fuel concern about inflation remaining more stubborn than anticipated. The overall trend in inflation remains cautiously disinflationary though as developments in goods and services inflation were more or less as expected. By country, we see that rising prices mainly came from France and Spain, while drops in the Netherlands and Italy kept inflation broadly in check. Energy effects and how they translate to consumer prices – look at rising regulated prices in France – were important drivers of differences this month. Looking ahead, more declines in inflation are in the making. In Germany, we expect a significant drop next month as base effects from government support drop from the data. Surveys also point to a sizable disinflationary effect for goods prices, while services inflation is set to fall more slowly thanks to higher wage costs. Indeed, wage growth is still trending above a level consistent with 2% inflation. For the European Central Bank, these August inflation data were among the most important data points ahead of the governing council meeting in two weeks’ time. While inflation remains stubborn enough to make ECB hawks uncomfortable, it does look like a further deceleration in inflation is in the making for the months ahead. Given the ECB mantra over recent months that doing too little is worse than doing too much in terms of hikes, we still expect another 25 basis point rate rise, despite this being a close call.

Italian inflation continued to decelerate in August The August inflation release provides comforting signals of a broad-based deceleration in inflation, including the core measure. The trend looks set to continue until year-end, at a pace which will be affected by residual base effects. We stand by our 6.4% forecast for 2023 HICP inflation.   Goods and services both decelerate The preliminary estimate by the Italian National Institute of Statistics (Istat) of August consumer prices confirms that inflation is on a solid decelerating path. The headline measure was down to 5.5% (from 5.9% in July), broadly in line with expectations, driven by the non-regulated energy component, recreational services, fresh food, transport services and durable goods, only partly compensated by housing services and regulated energy goods. The statistical carryover for 2023 headline inflation now stands at 5.7%. Both goods and service inflation decelerated to 6.4% and 3.6%, respectively, and food inflation, at 9.6% in August, fell below double digits for the first time since July 2022.   Core inflation falls Core inflation, which strips out energy and fresh food, and is a key indicator in the eyes of the European Central Bank, also sent encouraging signals, falling to 4.8% from 5.2% in July, confirming the deceleration pace seen since June. This reflects the deceleration in services, not yet impacted by the recent acceleration in hourly wages (at 3.2% year-on-year in June)   Further declines in inflation expected... As the pace of the decline in headline inflation is still being set by the energy component, we should be aware that substantial base effects have yet to play out as a decelerating factor over the autumn. Indicators such as import prices and producer prices continue to point to softer headline inflation ahead. Import prices contracted by 9.8% in June and producer price inflation, at -5.5% YoY in June, has been in negative territory since April. The latter is still driven by the energy component (-26.2% YoY in June), however stripping out energy and construction, the PPI inflation read in June of 2% confirms a clear declining trend.   ...but the pace will depend on a combination of factors If the pricing pipeline is sending encouraging signals, other indicators coming from August business surveys deserve attention. For the first time since September 2022, the manufacturers’ pricing intentions balance rose in August from the previous month and increased in services for the second consecutive month. The only area where the deceleration in price increase intentions remains in place is the retail sector. This is a warning signal that the current pace of inflation deceleration, particularly at the core level, cannot be taken for granted. The wage cost variable will likely have a say in the process. Here, indications are mixed. If some more wage concessions look likely over the next few months as a consequence of past inflation surprises, labour market tightness might loosen a bit. July labour market data, also released earlier today, offer some tentative evidence of this. For the first time over the last eight months, employment declined from the previous month and the unemployment rate edged up to 7.6% (from 7.4% in June). The Italian labour market is possibly finally responding to cyclical developments. After today’s inflation release, we confirm our forecast for average HICP inflation for 2023 at 6.4% YoY.

China’s latest activity data worsened across nearly every component. Markets have given up looking for fiscal stimulus, and have started making comparisons with 1990s Japan. We don’t agree with the Japanification hypothesis, but clearly a substantial adjustment is underway, and we have trimmed our growth forecasts accordingly.   Deflation is very different to this A couple of weeks ago, we wrote a piece debunking an argument that was doing the rounds which argued that China had slipped into deflation and was turning into a modern-day equivalent of 1990s Japan. Being old enough to remember that period quite well (unlike I imagine most of the proponents of the idea), it was clear to us that there was no merit to this view. Firstly, deflation is not negative consumer price inflation. Deflation is a much broader collapse in the general price level, which, in addition to consumer prices includes falls in real and financial asset prices, as well as money wages. And though we have seen some renewed falls in house prices, stocks are not looking very robust, and there is indeed some year-on-year decline in consumer prices, however, money wages are still positive. Moreover, the single defining feature of 1990s Japan was that it was the result of a monetary-induced bubble and subsequent bust. There was a property element to Japan's problems, but much more besides. Japan's response was a massive fiscal expansion, which failed to do much more than saddle the economy with a mountain of debt, and the rest is largely history. China’s issues also concern the property market, but it is the existence of large-scale local government debt that is the main constraint on the recovery. There is little evidence of any financial or property bubble. As a result, the government responses, of which there have already been a great many, have almost entirely focused on supply-side measures, which are only having a very marginal effect on activity.     Local government financing vehicles swell government debt    

A busy week ahead By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The S&P500 ended last week on a meagre positive note, as the selloff in Apple shares slowed. Apple will be unveiling the new iPhone15 after the Chinese storm. Last week's selloff was certainly exaggerated. Once the Chinese dust settles, Apple's performance will continue to depend on the overall sentiment regarding the tech stocks, which will in return, depend on the Federal Reserve (Fed) expectations, the rates, energy prices, Chinese property crisis, deflation risks, and how that mix affects the global price dynamics.   China announced this morning that consumer prices rose by 0.1% y-o-y in August, slower than 0.2% penciled in by analysts and after recording its first drop in over two years of 0.3% a month earlier. Core inflation, excluding food and energy prices, rose 0.8% y-o-y, at the same speed as in July, and remained at the fastest pace since January. The numbers remain alarmingly low, and the recent stimulus measures announced by the government did little to boost investors' appetite. The CSI 300 was thoroughly sold on the rallies following stimulus news. And the yuan continued trending lower against the US dollar.  The US dollar is under a decent selling pressure this morning, particularly against the yen, after comments from the Bank of Japan (BoJ) Governor Ueda were interpreted as being 'hawkish'. Ueda said that 'there may be sufficient information by the year-end to judge if wages will continue to rise', and that will help them decide whether they would end the super-loose monetary policy and step out of the negative rate territory. The remarks were disputably hawkish, to be honest, but given how negatively diverged the Japanese monetary policy is, any hint that the negative rates could end one day boosts hope. The 10-year JGB yield jumped 5bp to 70bp on the news, and the USDJPY fell to 146.30. The USDJPY has a limited upside potential as the Japanese officials have been crystal clear last week that a further selloff would be countered by direct intervention. But the pair has plenty of room to drop significantly, when the BoJ finally decides to jump and leave the negative rates behind.   This week, the US inflation numbers will give the dollar a fresh direction, and hopefully a softish one. The headline inflation is expected to tick higher from 3.2% to 3.6% in August, on the back of rising energy prices, while core inflation may have eased from 4.7% to 4.3%. 'We've gotten monetary policy in a very good place' said the NY Fed President Williams last week. Indeed, the Fed hiked the rates by more than 500bp and shed its balance sheet by $1 trillion, while keeping the GDP around 2%, as inflation eased significantly from the 9% peak last summer to around 3% this summer. But crude oil cheapened by more than 40% between last summer and this spring, and the prices are now up by nearly 30% since then. The Fed will likely hold fire when it meets this month, but nothing is less sure for the November meeting. This week's inflation data will be played in terms of November expectations.   For the European Central Bank (ECB), the base case scenario is a no rate hike at this week's monetary policy meeting, but the European policymakers could announce a 25bp hike despite the latest weakness in economic data. The EURUSD is slightly better bid this morning, expect consolidation and minor correction toward the 200-DMA, 1.0823, into the meeting. The ECB, unlike the Fed, is not worried about surprising the market, on one side or the other. A no rate hike – even if it's a hawkish pause - could push the EURUSD to below 1.0615, the major 38.2% Fibonacci retracement, into a medium term bearish trend whereas a 25bp hike should trigger a rally toward the 1.09 level.   On the corporate calendar, ARM will go public this week, in what is going to be this year's biggest IPO. The company is expected to price on the 13th of September with a price range of $47-51 per share, and will start trading on Nasdaq the following day. ARM is expected to be valued at around $52bn, roughly 20 times its last disclosed annual revenue on expectation that the chips needed to power the generative AI will make ARM a sunny to-go place. Hope it won't be stormy.  

Asia Morning Bites US inflation report out tonight could see Asian markets mark time today.   Global Macro and Markets Global markets:  US stocks are up one day, down the next at the moment. Yesterday, it was time for some losses led by tech stocks following an Apple event to launch the iPhone 15. The S&P 500 dropped 0.57% while the NASDAQ lost 1.04%. This was actually in line with the steer from equity futures yesterday. But today, they are giving little away. Chinese stocks fell also. The Hang Seng was down 0.39% and the CSI 300 was down 0.18%. 2Y US Treasury yields nosed up 2.9bp to 5.02%, while the 10Y Treasury yield was marginally lower by 0.8bp taking it to 4.28%. EURUSD is slightly higher at 1.0758, but spent a lot of time yesterday exploring the downside before recovering. This hasn’t helped the AUD, which has been steady to slightly weaker over the last 24 hours, sitting at 0.6427 currently. Cable also slid yesterday and made a less robust recovery than the euro, leaving it at 1.2492 currently. And the JPY is also softer, rising to 147.126.  The PBoC’s recent browbeating of the market still seems to be keeping a lid on the CNY, which remains at 7.2923. We’d expect it to test the 7.30 level again in the coming days, though tomorrow’s data dump will need to be taken into account – we think it might be slightly less negative than in recent months…The KRW had a positive day, rising 0.28% to 1327.64, and the THB weakened 0.38% to 35.640, but there were few other notable movements in the rest of the Asia FX pack.   G-7 macro:  Today, we get August inflation data from the US. And the news will be mixed. Headline inflation will likely rise from 3.2% to 3.6%YoY - all the helpful base effects that helped lower inflation in the first half of the year are used up now, and the month-on-month rate at 0.6% (expected), is still far too high to result in anything other than an inflation increase. But it is exactly the opposite story for core inflation, which has been much stickier, but could now benefit from more helpful base effects, and the fact that most of the price increases are in the non-core food and energy sectors. We should see core inflation falling to 4.4% (consensus 4.3%) from 4.7% YoY. Exactly how the market takes this mix of data is difficult to judge in advance, and could come down to small deviations from the consensus numbers on both figures. Other than this, the UK releases a raft of production, trade, construction and monthly GDP data for July.   India: Trade balance data for August will likely show the deficit in the -USD20bn to -USD21bn range. Export growth has been on a slow but steady decline for a long time, and was -15.86%YoY in July. Looked at in USD levels terms, exports are still trending slightly lower, but the rate of annual decline should moderate to low single digits this month. Inflation data released yesterday evening came in at 6.83%, only slightly higher than our 6.7% forecast, and slightly lower than the consensus 7.1% estimate.   South Korea: The jobless rate unexpectedly declined to 2.4% in August (vs 2.8% July, 2.9% market consensus). The construction sector added jobs for the first time in six months but manufacturing shed jobs for a second month. With summer holidays underway, hotels and restaurant jobs gained. Rising pipeline inflation raised concerns that consumer prices could rise more than expected in the coming months. Import prices surged 4.4% MoM nsa (0.2% in July), the largest increase in 17 months, but due to base effects the YoY growth still fell -9.0%YoY (vs -13.6% in July). Weak currency and strong commodity prices are the two main reasons for the price increases. The KRW is hovering above the 1,300 level and oil prices continue to rise. We are concerned that consumer price inflation may rise more than expected. The tighter job market and rising prices will support the BoK’s hawkish stance. But we still don’t think this will push them to deliver additional hikes by the end of this year given sluggish exports and weak investment.   What to look out for: US CPI inflation and China data South Korea unemployment (13 September) Japan PPI inflation (13 September) India trade balance (13 September) US CPI inflation (13 September) Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)

Polish manufacturing bottoming out and producer prices starting to stabilise Industrial production fell 3.1% YoY in September, but there are early positive signs as seasonally adjusted data points to a turnaround. Producer prices (PPI) also started stabilising, but deflation in YoY terms is there to stay for some time   Industrial production fell by 3.1% YoY in September (ING: -3.8%; consensus: -3.0%) with a further deepening of the decline in manufacturing (-3.7% YoY vs. -2.0% in August), though it is worth remembering that September this year had one working day less than in September 2022, what deducted ca 3pp from production in YoY terms. There are, however, some encouraging signs as seasonally adjusted data points to a 0.9%MoM increase in output. It was the second consecutive month of rising activity growth in seasonally adjusted terms.   Industrial ouput bottoming out Industrial production, 2015=100, SA Large annual declines in production were recorded in export-oriented industries: metals (-15.7% YoY), electrical equipment (-15.0% YoY), and electronic and optical products (-10.4% YoY). At the same time, increases were recorded in areas related to investment and energy. Production in the “repair and installation of machinery and equipment” increased by 7.3% YoY. Growth was also observed in the “electricity, gas, steam and air conditioning supply” (+3.7% YoY). This suggests that we should see continued expansion of investment and further deepening of the decline in exports in the composition of 3Q23 GDP.     Economy reached a bottom and should slowly recover Although the headline production indicator on an annual base still looks dismal, the seasonally adjusted data suggests that industry has most likely found the bottom and has started to rebound. Business surveys suggest that the decline in orders is slowing down, which should support a gradual stabilisation and then a bounce back in activity in the coming months.   Producer prices stabilise but the recent decline is yet to pass to consumer prices Producer prices (PPI) fell by 2.8% YoY in September (ING: -3.4%; consensus: -2.7%), following a 2.9% YoY decline in August (data revised). On an annual basis, we still have deflation, but the price level is beginning to stabilise. The MoM decline in prices over the past two months has stalled. Despite strong reductions in wholesale fuel prices, the magnitude of the price decline in the 'coke and refined petroleum products production' category turned out shallower than expected   PPI deflation continues, but price level ceased to decline PPI inflation, %YoY  

French inflation falls in October, but should soon stabilise Inflation in France fell to 4%, compared with 4.9% in September. The trend towards disinflation is well underway in France, but it will take time. The fall in inflation is likely to be much smaller in the coming months.   Inflation falls to 4% in October Consumer price inflation stood at 4% in October, compared with 4.9% in September. This fall in inflation can be attributed to a slowdown in the prices of food (7.7% in October, compared with 9.7% in September), manufactured goods (2.3%, compared with 2.8%) and energy (5.2%, compared with 11.9% in September). Unlike in other European countries, energy inflation continued to make a positive contribution to French inflation in October, due to last year's tariff shield and the reduction in fuel prices, which had kept energy prices lower in France than elsewhere. On the other hand, service prices accelerated again, rising by 3.2% year-on-year in October, compared with 2.9% in September, a sign that the repeated increases in the minimum wage are continuing to drive up prices in the service sector. Inflation according to the harmonised index, which is important for the ECB, stood at 4.5%, down from 5.7% in October.   Disinflation will take time Overall, this data confirms the findings of previous months. The trend towards disinflation is well underway in France. Nevertheless, disinflation will not be a smooth ride and will take time. Inflation is likely to remain close to 4% for the next few months. Given the various government interventions on energy prices over the past year, the base effects of energy inflation are less favourable in France than elsewhere. What's more, is that the recent rise in oil prices means that the trend will be less clear-cut than expected and that further spikes in inflation caused by energy inflation cannot be ruled out in the coming months. Despite weakening demand, the indexation of minimum wages to inflation is likely to maintain strong momentum in services prices, which could become the main contributor to inflation over the months ahead. On the other hand, inflation in food and manufactured goods should continue to fall as a result of falling global demand, high inventories and lower production costs.  Given the latest geopolitical developments and their impact on energy prices, inflation should continue to fall over the coming months – albeit more slowly than previously forecast. In its latest forecasts published in September, the Banque de France expects inflation according to the harmonised index to return to 2.2% at the end of 2024 and 1.6% at the end of 2025. However, we will probably have to wait longer to see inflation return to these levels. We are expecting inflation according to the harmonised index to be 2.5% at the end of 2024 and 1.9% at the end of 2025.

With just two trading days remaining until the new year, attention in the City of London is shifting towards the prospects for 2024. Questions about the pace of interest rate cuts, the possibility of the UK avoiding a recession, the timing of the general election, and the potential victor are in focus.  One point of view indicates a more optimistic outlook for the UK as it "turns a page from the difficult post-pandemic years." PwC identifies various reasons for this optimism, including an anticipated improvement in conditions for households as the minimum wage is set to increase by almost 10% in the spring. Predictions suggest a faster-than-expected decline in inflation, nearing the UK's 2% target, contributing to a positive shift in consumer sentiment and while growth is anticipated to be modest, the UK is projected to exhibit a faster recovery relative to pre-pandemic levels compared to Germany, France, or Japan. Forecasts indicate that the UK will be the fourth-best performing G7 economy concerning pre-pandemic levels, with real GDP expected to be around 2.7% higher in 2024 on average relative to 2019 levels. However, challenges persist as consumer prices, despite an expected cooling of inflation, are projected to remain about a quarter higher than in early 2021 and with London's average rents are forecasted to continue rising, reaching over £2,000 per month by the end of 2024, approximately three times higher than the north-east's average while the rest of the UK is also expected to witness a continued uptrend in rents, with an average increase of over 5% in 2024. Additionally, a notable surge in corporate insolvencies is anticipated, with nearly 30,000 firms expected to face challenges due to high interest rates and increased costs which is likely to be felt more acutely by smaller businesses, particularly in sectors such as hotels & catering, manufacturing, and transport & storage and which could cause significant issues if it were to lead to an increase in unemployment just as the Bank of England is beginning to shift its policy and in particular around election period, potentially further influencing the ultimate results.

UK wages/UK CPI (Dec) – 16/01 and 17/01 Since March of last year headline CPI in the UK has more than halved, slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. The decline in headline inflation is very much welcome, however most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing. Food price inflation for example is still much higher, slowing to 6.6% in December, while wage growth is still trending above 7% at 7.2%. Services inflation is also higher at 6.3% while core prices rose at 5.1% in the 3-months to November.   This week's wages and inflation numbers are likely to be key bellwethers for the timing of when the Bank of England might look at starting to reduce the base rate, however the key test for markets won't be on how whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers. Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 7% is likely to stay the Bank of England's hand when it comes to looking at rate cuts. It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike. That means it will take more than a further slowdown in the headline rate for these 3 MPC members to reverse that call, let alone call for rate cuts. Expectations are for wages to slow to 6.7% and headline CPI to come in at 3.8%.  

The Chinese yuan remained under pressure last week and ended it slightly lower against the broadly stronger US dollar. Data confirmed that China experienced the longest deflationary period since 2009, registering three months of declining consumer prices in a row. In December, the CPI index fell by 0.3%. The fact that this was a smaller decline than the month previous (-0.5%), and slightly more limited than expected (-0.4%), has not allayed concerns about domestic demand. Most other releases, including PPI inflation and financial data, also failed to provide optimism, although trade activity did, at least, pick up at the end of the year. Amid concerns about the economy's weak performance, the PBoC injected CNY 216 billion in fresh medium-term funds into the banking system today, but contrary to expectations it did not lower the 1-year MLF rate. Looking ahead, attention will be on the year-end data package to be released on Wednesday. GDP growth is particularly worth watching, as it could set the tone for sentiment toward China in 2024.