Last week, the US personal consumption expenditure (PCE) deflator came in as expected making a strong case for the Fed to start cutting key rates at its September meeting. Locally, headline and core consumer inflation both eased in June, to 5.1% year-on-year (from 5.2%) and 4.5% year-on-year (from 4.6%) respectively.
International Market Developments
June’s US personal consumption expenditure deflator came in as expected. The 0.1% increase in the PCE deflator from May to June lowered the year-ago rate from 2.6% to 2.5%, a slight acceleration from May’s monthly rate, but consistent with a clear downshift that has occurred in recent months. The core PCE deflator, which excludes food and energy and is the Federal Reserve’s preferred measure of inflation, rose 0.2% in June. The increase aligns with market expectations and keeps the rate versus a year-ago at 2.6%. The second quarter’s encouraging inflation data have set the stage for the Fed to start cutting interest rates. Investors expect a cut at September’s meeting, which will be more clearly signaled when policymakers meet this week, and where the Fed is expected to hold the Federal funds target range at 5.25-5.50%. Investors will be paying close attention to Fed Chair Powell’s post-announcement press conference for signals on an upcoming easing cycle.
US GDP grew at a seasonally adjusted annualised rate (saar) of 2.8% in Q2 (i.e. 0.7% q/q), firmer than the 2.0% market consensus estimate and above Q1’s 1.4%. Within this, household consumption grew by a solid 2.3% (saar). There were no major distortions from inventories or net trade in the latest quarter – final domestic demand expanded by 2.7%, virtually the same pace as the economy as a whole. Overall, economic conditions remain relatively buoyant.
Local Market Developments
Headline CPI inflation was in line with expectations at 5.1% in June, down just 0.1pp from May. Core CPI inflation printed at 4.5%, 0.1pp below consensus market expectation, as housing inflation edged lower. Food inflation continued to ease but less than expected, with underlying data showing the first strong, but narrowly based, sign of some pass-through from the recent rise in crop prices. Investors expect headline CPI inflation to continue to soften in the coming months. The downside surprise in core inflation and the absence of any meaningful pressures in housing costs (a risk flagged by Governor Kganyago last week) likely marginally strengthen the dovish case for the MPC ahead of the September meeting.