Will the Federal Reserve’s most popular inflation measure edge larger?  | USAEMALL.com

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The Federal Reserve’s preferred inflation metric is expected to show a slight tick-up in price pressures in July, which could help convince the US central bank to shy away from delivering a larger than usual half-point cut in interest rates when it meets next month.

On Friday, the Bureau of Economic Analysis will release the personal consumption expenditures index data for July, which economists surveyed by Reuters forecast will show the headline figure at 2.7 per cent year-over-year, up from 2.6 per cent the month prior. The core measure, which strips out the volatile food and energy sectors and is most closely watched by the Fed, is expected to be 2.6 per cent, a step up from the 2.5 per cent rate in June.

The PCE data will follow positive consumer price data earlier this month, which showed inflation at 2.9 per cent in July, below economists’ expectations and under 3 per cent for the first time since March 2021. 

Even if the numbers do show a marginal rise in PCE last month, the broader slowdown in inflation this year and evidence that the US labour market has been weakening is likely to keep the Fed on track to cut interest rates when it meets in September. Fed chair Jay Powell said on Friday that “the time has come for policy to adjust”, his clearest signal yet that the central bank is primed to lower borrowing costs.

Traders in the futures market are betting on at least a quarter-point rate cut, and are pricing in a roughly one in three possibility the Fed may cut by as much as 0.5 percentage points.

“A little bit of a wiggle on inflation is not as important as what is going on in the labour market. The important trend is that inflation is coming down more broadly,” said Eric Winograd, senior economist for fixed income at AllianceBernstein. Kate Duguid

Will Eurozone inflation resume its decline?

Eurozone inflation has been volatile this year and has not yet fallen to the European Central Bank’s target of 2 per cent after accelerating in May and July, but traders are hopeful August will deliver the lowest annual inflation rate since 2021.

Economists polled by LSEG forecast the headline rate will drop to 2.3 per cent in August when figures are published on Thursday, down from 2.6 per cent in July.

Investors will be looking to see improvements in core components — which strip out volatile food and energy prices — for signs that persistent price pressures are easing. Analysts at Pantheon Macroeconomics forecast the core inflation rate will ease to 2.8 per cent from 2.9 per cent in July, with services inflation more sticky at 4 per cent. 

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said there were “upside risks” to both headline and core inflation towards the end of the year. “The former will be pulled up by energy inflation and a small rise in food, alcohol and tobacco, while core inflation likely will be held around 3 per cent, due to an advance in non-energy goods inflation.”

Still, the European Central Bank will be encouraged by a sharp fall in negotiated pay growth in the Eurozone. Pay rose 3.6 per cent in the second quarter compared with the same period last year, down from the 4.7 per cent annual growth rate in the previous three-month period.

Traders in swaps markets have fully priced a September quarter-point rate cut from the ECB, with one or two more expected by the end of the year. Mary McDougall

Will the Chinese renminbi continue to strengthen against the dollar?

After fervent speculation about devaluation earlier in the year, the renminbi has strengthened significantly against the dollar in the past few weeks. Some analysts think the move could have further to run.

The Chinese currency has risen 1.6 per cent in the past 30 days, to just under 7.14 to the dollar. The easing of depreciation pressure has led the Chinese central bank to adopt a less interventionist approach to its daily fixings of the currency.

One reason for this is the smaller spread between US and Chinese sovereign bond yields. Growing expectations that the Fed will cut rates in September has benefited Asian currencies including the renminbi, Malaysian ringgit and Indonesian rupiah. 

The unwinding of a carry trade, in which traders borrow in renminbi to buy higher-yielding assets, similar to the dollar-yen trade that reverberated around global markets at the start of the month, has also lifted the currency.

Meanwhile, Kamala Harris’s improving odds of winning the US presidency in November have given rise to hopes of a relatively less confrontational relationship with Washington compared with a second Donald Trump administration, which “could be a further catalyst for upside”, according to analysts at ING Economics.

Their baseline scenario is that the currency strengthens further to 7.10 to the dollar by the end of the year. Arjun Neil Alim