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Inflation Continues to Rise in the US and Europe

Miguel A. Rodriguez
Miguel A. Rodriguez
01 September 2023

The US Personal Consumption Expenditure (PCE) for July showed that inflation is still rising, as did the Consumer Price Index (CPI) for June in Europe. As the PCE is the Federal Reserve’s (Fed) preferred metric on inflation, expectations that interest rates may be kept stable in September are mounting. The weakening economy in Europe may sway the European Central Bank (ECB) to do the same.

US July PCE moved higher, as expected

Yesterday, the North American indices opened the day higher as the US PCI inflation data met expectations, raising hopes that the Fed would decide to stop rate increases at its upcoming meeting.

The PCE price index, regarded as the Fed's favoured inflation gauge, increased by 3.3% in July compared to the same month last year. This is in line with average analyst projections.

Also meeting expectations, the PCE price index increased 4.2% in July, year-on-year, when the volatile food and energy components were excluded.

Inflation is stabilising 

The underlying PCE and the general PCE both experienced slight increases compared to the figures for the month of June, so in no way can inflation be considered to be declining with this data. With this being said, it could be considered to be stabilising but at levels that are still below the Fed's 2% target. Nevertheless, the figures were in line with forecasts and did not surprise the market.

But although the figures coincided with the forecasts and therefore did not come as a surprise to the market, it should be noted that in both cases, both the underlying PCE and the general PCE experienced slight increases compared to the figures for the month of June, therefore that in no case can inflation be considered to be receding with this data, in any case it could be said that it is stabilizing but at levels that are still far from the Federal Reserve's 2% target.

Therefore, a rate cut, which is what the interest rate curve now indicates, is still far off even if the Fed decides to suspend or even end rate hikes. If so, after the recent adjustments to the downside, treasury yields (market interest rates) should resume their upward trajectory.  

The 10-year bond was trading at roughly 4.11%, down from 4.30% during the previous week, with Treasury yields essentially constant.

June’s CPI for the eurozone showed still high inflation

Inflation data for Europe were released as the market had anticipated. The CPI for June was 5.3%, which in theory would point to a continuation of the ECB’s rate hike. However, the European economy is worryingly slowing down, which may be the reason the central bank decides against continuing the path of increasing interest rates. Germany, the eurozone's largest economy, had its retail sales decline by -2.2% in July.  

German 10-year Bond yields decreased by over 9 basis points in response to the news, which resulted in a drop in the EUR/USD pair of nearly 100 basis points from the day's high of 1.0945.

DMO 1.9.2023 graph.png

EUR/USD daily trading chart September 1, 2023. Sources: Bloomberg, Reuters

Key Takeaways

  • North American indices ticked higher yesterday.
  • US core PCE for July rose to 4.2% as expected.
  • Markets hope this could point to a pause in rate hikes by the Fed.
  • Inflation is stabilising, but still not near the Fed’s 2% target.
  • Treasury yields were virtually unchanged yesterday.
  • The CPI for June in the eurozone came out at 5.3%.
  • The weakening of the European economy could persuade the ECB to leave rates stable.
  • German 10-year Bond yields fell almost 9 bps.
  • EUR/USD lost 100 pips from the day's high at 1.0945.

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Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.