Once again there was a bias towards “risk off” in financial markets last week, with the safe-haven Dollar appreciating about 0.6% and the S&P 500, which was choppy, closing down 0.6%. Nevertheless the Dollar trade weighted index remains firmly within its 11-week range of just 1.7%.
The focus early in the week was very much on Tuesday’s release of US CPI-inflation data for August. While headline CPI-inflation fell to 5.3% yoy from 5.4% yoy in July in line with the consensus forecast, the arguably more important measure of core CPI-inflation, which strips out volatile food and energy prices, fell more sharply than expected. In month-on-month terms it slowed sharply to 0.1% (vs 0.3% expected), the slowest rate since February. As a result the year-on-year rate slowed to 4.0% (vs 4.2% expected) from 4.3% in July. Other US macro data, however, were stronger than expected. US retail sales rebounded 0.7% mom in August following a 1.8% mom contraction in July while the Philadelphia and NY Fed manufacturing surveys both pointed to stronger economic activity in September.
It may be too early to argue that year-on-year CPI-inflation has peaked in the US and there are tentative signs that economic growth may have rebounded in recent weeks. However, odds are still that the Federal Reserve will wait until its November policy meeting to announce when and by how much it will shrink its monthly asset purchases.
The Euro and Sterling were level-pegged last week, both depreciating about 0.7% versus the US Dollar but the GBP/EUR has fallen below 1.17 this morning. The Euro and other European currencies, in particular the Swiss Franc (-1.6%), remained under pressure last week due to European natural gas and power prices hitting fresh highs in the wake of energy supply issues.
UK macro data were mixed. Labour market figures for July-August were strong and UK CPI-inflation rose faster-than-expected in August with core CPI-inflation jumping to 3.1% yoy from 1.9% yoy in July. However, UK retail sales once again disappointing, contracting 0.9% mom in August, versus expectations of a 0.5% mom rebound. For the first time since this data series began monthly retail sales contracted four months in a row. While UK retail sales remained above their pre-pandemic level, they have fallen 5% since April.
The Australian and Kiwi Dollars weakened respectively 1.2% and 1.0% versus the US Dollar. The former weakened only modestly early in the week but started depreciating more sharply from 16th September onwards following the release of weak Australian labour market data for August.
