The noise

  • Inflation in the US cooled considerably in June, with CPI rising only 3% from a year ago. This is the lowest rise in inflation in over two years and comes as good news for the Fed, markets, and consumers. The figure came in as expected by economists as it continued to fall off the back of declining energy and goods prices, but the rapid fall in services inflation came as a surprise. It’s a major step towards ending the cost-of-living crisis in the US, although the Federal Reserve seem set on another interest rate rise later in July.

  • The UK economy contracted by less than expected in May, with GDP shrinking 0.1% vs an expected 0.3% drop month-on-month in May. The year-on-year reading for May also beat expectations, falling 0.4% vs an expected 0.7% decline, as the UK economy continues to show resilience in the face of high inflation and rising interest rates.

  • The EU parliament have implemented new legislation that will bring more charging stations and greener maritime fuels to member nations. The new rules will require electric recharging stations every 60 km for cars, 120km for trucks and buses, and hydrogen refuelling stations every 200km. This comes as part of the “Fit for 55 in 2030 package”, the EU’s aim to decarbonise transport and plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.


‚ÄčThe numbers


The nuance

With US inflation seemingly leading the race back to the globally adopted inflation target of 2% versus its peers, let’s dive in to why this might be the case and what it means. As mentioned in the noise, services inflation continues to fall at a faster rate than expected. This comes as a surprise given the ongoing strength of labour markets, with wages growing and unemployment hovering near record lows, as a big part of service costs will be wages. This could be a result of falling energy and food prices, which are components of many services such as a restaurant meal. Or it may be that labour market data is lagging and CPI data is current, so the economy is slowing faster than labour market data would suggest.

The US Federal Reserve will likely have to stick to the 25bps rate hike it has suggested to maintain credibility, but bets that the Fed will continue raising rates beyond July are quickly receding. Bond investors are now expecting a rapid slowdown in the overall economy, that will force the central bank to cut rates, leading to yields falling. Equities have rallied as a result of the expectation of falling yields, as the likelihood of a steep earnings decline drops.

 


All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

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