The widely anticipated US CPI report for August printed higher than expected but the response across financial markets was largely subdued. US equities were little changed while the lasting impact on currency and bond markets was limited.
US consumer prices rose 3.7% an annualised basis, up from 3.2% in July and above consensus forecasts of 3.6%. The increase was predominantly driven by a 10.6% jump in gasoline prices. On a monthly basis, headline CPI increased 0.6% while core prices increased 0.3%. The core reading was above 0.2% consensus estimates due to rising prices for airfares, car rental and motor insurance.
Market pricing for the Fed funds rate was little changed following the CPI data and continues to imply little chance of a hike next week and about 50% odds of a 25bp increase in November.
Eurozone Industrial production fell 1.1% in July which was more than expected raising concerns about activity ahead of the finely balanced ECB monetary policy decision this evening. Markets are pricing a ~65% chance of a 25bp hike.
A Reuters news report suggested that the ECB’s new set of macroeconomic projections will show inflation remaining above 3% next year. However, this is balanced by weak economic activity. Recent PMI data points to a contraction in both manufacturing and services activity. Meanwhile, GDP is tracking below the ECB’s June projections suggesting downside risks to its updated growth forecasts.
The UK economy contracted 0.5% m/m in July which was more than expected with adverse weather and public sector strikes impacting spending and activity. The major sectors of the economy – services, manufacturing, and construction – all fell in July. Despite the weaker data, the market continues to see a high chance of the Bank of England tightening by a further 25bps at its policy meeting next week.
US treasuries initially sold off following the higher-than-expected CPI data. 2-year yields increased to 5.08% from 5.04% ahead of the release. There was a quick reversal off the yield highs with the move lower extending to 4.96%. In similar price action, yields on 10-year treasuries traded as high as 4.34% but failed to breach cycle highs, and reversed lower. Despite the offering the highest yield since 2011, the US$20 billion 30-auction tailed by a full basis point with primary dealers getting high allocations.
In currency markets, the US Dollar was little changed despite the upside inflation surprise. An initial rally failed to extend higher and reversed with the move in front end US rates. In the majors, EUR/USD was stable near 1.0750 while a brief spike in USD/JPY to 147.70 was short lived. GBP/USD fell to fresh 3-month lows following the weaker than expect growth data before retracing the losses.
The Yuan made gains in Asian trade yesterday which has extended overnight. China will increase bill sales in Hong Kong to soak up yuan liquidity making it more expensive to short the currency. Implied 3-month CNH interest rates have moved sharply higher and are now above 4%. This is the latest in a series of measures undertaken by the PBOC aimed at stabilising the Yuan and to discourage speculative short positions.
After a period of volatility around the US CPI release, NZD/USD settled higher in overnight trade moving upwards 0.5925. The NZD is higher on the cross rates with NZD/AUD back above 0.9200 albeit in a continuation of largely rangebound trade during September.
NZ government bonds were unchanged in the local session yesterday with 10-year bond yields stable at 4.98%. Bonds outperformed swaps which were 2-4bps higher in the belly of the curve. Australian 3 and 10-year bond futures are about 3bp lower in yield since the local close yesterday.
New Zealand Debt Management is tendering NZ$500 million of nominal NZGBs today split across 15 May 2026 ($200m), 15 May 2031 ($200m) and 15 April 2041 ($100m). In addition, inflation indexed bonds will be offered for the first time since May.
Australian employment data is released today and is expected to rebound from the weak July outturn. Later this evening, the focus will be on the ECB, as previously mentioned, alongside US PPI, retail sales and jobless claims data. Initial jobless claims are expected to increase after last week’s print was depressed by the impact of Hurricane Idalia.
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