Doves Ticking Boxes
The week began with the political bombshell of the French revolting so far against the “far-right” that they let the “far-left” win the most seats. Indeed, as the ‘cordon sanitaire’ held once again, contrary to all the opinion polls, Marine Le Pen’s Rassemblement National is out of any plausible government for now at least. But Alastair Newton sees the cost of this as high in both the short- and medium-term (see France: Back To The Future? ).
Voters seem to have a much clearer idea of what they don’t want than what they do. As we noted last week, the rejection of the Conservatives and the SNP in the UK’s general elections was a more powerful push than any pull to Labour. France has followed with the same push. US Democrats should be concerned by the potential to be lumped into the same bucket if they persist in pushing Joe Biden. Not that Trump doesn’t repulse many voters. Still, rather than “better the devil you know”, voters might conclude it is “better the devil who knows what he’s doing”.
Another slowing in the US inflation data should help the Fed to know what it’s doing. Core CPI inflation of only 0.1% in June after 0.2% in May suggests pressures might be settling at a target-consistent pace. This summer stability still seems likely enough for the Fed, raising the likelihood of a September rate cut. However, it doesn’t mean the cut won’t be premature. A similar slowing occurred last year and reversed rather than extended.
Expected core inflation should be more policy-relevant than the current pace. Despite all the focus on service price inflation, it is a suboptimal signal for predicting medium-term inflationary pressures. Median inflation is typically the best single measure for prediction, but many options exist. Baskets built from multiple statistical measures are consistently better signals. The UK’s most potent underlying statistical measures are stuck above a target-consistent pace, and wage settlements worryingly still signal excessive fundamental pressure (see UK Inflation Basket Case ).
It’s been a quiet week for UK data, with another surprisingly strong GDP growth rate in May the highlight. It extended the above-trend rise to the point where the H1 excess broadly matches the shortfall from H2 2023. Returning to trend would require flat output through Q3, but other indicators suggest growth is only slowing, not stalling, so that may be too pessimistic. Activity data do not signal policy as overly tight, although unemployment suggests it is a little. Nonetheless, rate cuts remain likely as policymakers look elsewhere (see UK: GDP Fills In the H2 Hole ).
领英推荐
Huw Pill’s cautious comments don’t change our view on August. There hasn’t been much news since the BoE’s “finely balanced” 20 June meeting , so the logic of a low hurdle remains. The RBNZ , BOK , BNM and BCRP all stuck to the script this week, and the ECB should defer its next cut to September.
Inflation Forecasts
UK inflation in June features depressing base effects from transport (airfares and second-hand cars) and furniture, but some reoccurring shocks. Petrol prices dropped again, and the sharp rise in May’s airfares should weigh on June again, albeit with neither to the same extent as last year. The current consensus is for UK CPI inflation to remain at 2.0% while the RPI dips to 2.9%. We forecast 2.1% and 2.8%, respectively, although the differences may be marginal, with only 1bps needed to round the other way to reach consensus calls. Our services CPI forecast is consensus at 5.6% y-o-y.