Market Brief: Markets flat-line into tomorrow's US inflation report

Currency traders are so bored, they’re working just to pass the time this morning. Foreign exchange market ranges remain remarkably tight ahead of tomorrow’s US consumer inflation report, equity futures are pointing toward an incrementally-softer open, and Treasury yields are inching lower into what could be a news-light trading day. The pound is holding below the psychologically-important 1.25 threshold against the dollar after British wage growth stayed hot in the three months through July - making a compelling case for more Bank of England tightening - even as the broader labour market showed signs of easing, suggesting that a growth slowdown is ahead. Numbers released by the Office for National Statistics this morning showed average earnings excluding bonuses rising 7.8 percent year-over-year, while private sector pay packets climbed 8.1 percent. The unemployment rate ticked up to 4.3 percent and the number of vacant positions slipped below 1 million for the first time in two years.  In a speech given yesterday, Monetary Policy Committee uberhawk Catherine Mann said “I would rather err on the side of over-tightening. But, if I am wrong, and inflation decelerates more quickly and activity deteriorates more significantly, I will not hesitate to cut rates”. Markets are currently assigning circa-80-percent odds to another rate hike on September 22, and at least one additional move is considered possible in the following months. Yesterday’s verbal intervention from the People’s Bank of China succeeded in pushing the yuan higher in onshore markets, but the offshore exchange rate is holding below the 7.30 level initially breached in mid August. Signs of economic stabilization in data out later in the week - retail sales, industrial production, and fixed asset investment - could help narrow yield differentials slightly, but the gap between US and Chinese rates remains vast, meaning that the fundamental forces arrayed against the currency are still quite powerful. And the yen is struggling to hold gains achieved after Governor Ueda suggested that the Bank of Japan would consider lifting rates into positive territory if policymakers become confident that wages and prices are rising sustainably. Government bond yields are holding near ten-year highs, but remain far enough below their advanced-economy equivalents to provide speculators with ample fuel for carry trades and keep yield-seeking Japanese institutions shopping in global markets. 

Still Ahead

WEDNESDAY

August’s US consumer price index data is likely to paint a confused picture, with the headline print conflicting with the underlying details. The monthly pace of all-items price increases should increase to 0.5 percent (or higher) after a 0.2-percent gain in July as gasoline costs marched higher. But the core measures that exclude energy and food categories might exhibit continued signs of slowing, coming in around 0.2 percent month-over-month, essentially in line with the Fed’s 2-percent annualised inflation target. (08:30 EDT)

THURSDAY

With inflation running above target and expectations remaining stubbornly elevated, policymakers at the European Central Bank could choose to deliver a final rate increase, pushing its deposit rate to 4 percent. But with massive fissures opening under the real economy - with crumpling consumer and business sentiment, slowing US demand, and weak exports to China flagging a downturn ahead, officials may opt to stay on hold for now. (08:15 EDT) US retail sales numbers could disappoint, particularly after a string of better-than-expected measures of US consumer demand. Because the measure focuses on tangible goods receipts (and mostly doesn’t incorporate the Barbenheimer or Taylor Swift phenomena) a negative print looks probable. (08:30 EDT) The number of initial jobless claims submitted in the week ended is seen reverting higher after dropping to 216,000 in the prior week - but Labor Day-related distortions could again play havoc with the data. (08:30 EDT)

See our Economic Calendar for a more complete listing of upcoming data releases.