Markets still digesting Friday’s weaker inflation numbers

The dollar remains below Friday morning’s levels following a volatile week for the greenback: slowing inflation and bubbling tensions on the Korean Peninsula were enough to keep the market’s focus, but that could change this week.

Some of the fear that stalked markets last week has dropped out of prices through the weekend and Monday’s session in Asia mainly as a result of a lack of new or significant news over North Korea. US officials stated on the weekend’s political talk shows that there is no indication that war will break out while China’s President called for calm dialogue that will not “enflame” the situation.

The rebound has been less than convincing though and until we have some form of confirmation that North Korea has stood down threats to attack the US island of Guam then the scenario will linger in the back of the mind of all traders and investors. The rebound has been less than convincing though and until we have some form of confirmation that North Korea has stood down threats to attack the US island of Guam then the scenario will linger in the mind of the market.

Friday’s inflation number was not a binary call that would either delineate a rate hike or a pause at the Federal Reserve’s December meeting but for the release to miss estimates on both headline and core CPI – headline includes fuel and food costs while core doesn’t – suggests that the pressures that policymakers are looking for to bring interest rates higher simply aren’t there yet.

The lack of inflation and the uncertainty over its progress is less of a concern to our belief that the September Fed meeting will see the Federal Reserve begin to reduce its balance sheet in a bid to reverse out of the stimulus that its quantitative easing programs injected into the US economy.

Tomorrow’s retail sales and Thursday’s industrial production numbers are the most important data pieces from the US this week although political reaction to riots in Charlottesville – Trump returns to the White House – and the lead-in to the Jackson Hole economic symposium in a fortnight will also weigh.

The pound could get political again as PM May returns from holiday

A summer wherein Theresa May’s Cabinet was seen to be splitting down Remainer and Leave sides may have come to an end. A joint article by Chancellor Phillip Hammond and International Trade Secretary Liam Fox that pledged that the UK will have left the single market and the Customs Union by 2019 but that there will be a fixed transition period.

Theresa May is back in Downing St this week and the volume around Brexit is only set to increase with ministers due to publish papers on the government’s plans for Brexit over the course of the next 10 days on matters such as the customs union, fisheries, farming and the Irish border.

For sterling however it is that mid-month run of inflation (tomorrow), unemployment and wages (Wednesday) and retail sales (Thursday) that will either catapult it higher or further dampen spirits. We do not believe that inflation has peaked in the UK quite yet and a run towards 3% is still possible by October. Similarly we do not expect that we have seen the worst of the wage slowing quite yet and therefore the Consumer Pain Index (declining real pay) is set to extend.

Japanese GDP extends run of gains

Japanese GDP ran higher in Q2, hitting an annualized growth figure of 4%. Yen preferred to weaken however as it sat down following an easing of North Korea tensions. The data calendar is quiet and newsflow today will focus on political matters both here and abroad.