Morning Commentary: “Inflation Pressures Remain Muted” – Part II

Foreign Exchange - Morning Commentary

“Inflation Pressures Remain Muted” – Part II

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Yesterday’s headline was a direct quote from Fed Chairman Powell prior to his testimony before the House Financial Committee on Wednesday. He discussed the persistent undershooting of inflation relative to the Fed’s target of 2%, but mentioned that a number of factors affecting inflation were transitory.
Yesterday’s CPI and today’s PPI both surprised on the upside. While we acknowledge that one month’s data is not a game changer for the markets, the inflation data over the past two days reminds us that inflationary pressures are not as benign as many market pundits will have you believe. Inflationary pressures continue to percolate just below the surface.
U.S. PPI for June rose by 0.1% and ex-food and energy rose by 0.3%, both beating expectations. PPI YoY beat market expectations by rising to 1.7% but fell below the 1.8% mark from last month. PPI ex-food and energy remained at 2.3% YoY. Market reaction has been muted with U.S. interest rates near unchanged and U.S. equities are scheduled to open fractionally higher, piggybacking strong EZ equity performance. The U.S. dollar (DXY) is mixed to unchanged with the Swiss franc and Japanese yen outperforming.
  • Despite the euphoria surrounding U.S. and global equities, the underling global economy is still suffering from tariffs, trade tensions and uncertainty. Singapore GDP shrank by 3.4% in Q2 from the previous three months which is the biggest decline since 2012.  Singapore is often cited as a bellwether for global demand, is strongly integrated in regional and global supply chains and has a heavy reliance on foreign trade. Given these factors, today’s GDP report is noteworthy.
  • China posted another large trade surplus in June of $50.98 billion but the numbers within the report are showing further weakness. Imports declined by 7.3% YoY following an 8.5% drop in May. Exports also fell by 1.3% YoY. Imports from the U.S. have fallen by 31.4% (soybean imports down 37% YoY) and imports from Korea fell by 21.9% YoY. This data implies slower domestic demand within China as tariffs and trade friction continue to take their toll.
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