US June CPI inflation surprised once again to the upside as it came at 0.9% m-o-m well above consensus of 0.5%, marking the fastest monthly rise in prices since August 2008. The print also led the y-o-y CPI up to 5.4% versus expectations at 4.9%, also the strongest increase since 2008. The core CPI inflation (excluding food and energy) also surprised to the upside at 4.5% above expectations at 4.0%. Overall, the rise was mainly driven by volatile and niche categories with roughly two thirds of the increase led by used cars and travel/transport. Used cars came in at +10.5% m-o-m leading the y-o-y increase to 45.2% while hotels prices rose +7.0% m-o-m that accounts for 16.9% y-o-y.
Fed Chair Jerome Powell’s spoke in front of the House of Financial Services Committee reassuring that the Fed expects inflation to moderate and the economy is still a ways off from where it needs to be in order for the central bank to alter its policy and cut down asset purchases. On inflation, he noted that despite inflation increasing “notably” and higher than where the central bank was hoping to see, it is due to temporary factors, as much of the current price pressure comes from a few industries such as used cars that are sensitive to temporary conditions, adding “it’s just a perfect storm of high demand and low supply and it should pass”. On the economy, he said “conditions in the labor market have continued to improve, but there is still a long way to go.” He did mention that Fed officials are at least talking about reducing the pace of asset purchases which will be a topic of discussion at the September meeting, making it clear however, that the Fed will give the market ample warning time before any decision is made.
Other Central Banks
The Bank of Japan kept its key short-term interest rate unchanged at -0.1% and now expects the economy to expand 3.8% in the current fiscal year ending in March 2022, down from 4.0% projected in April. The BOJ also outlined its new scheme to combat climate change and will offer banks long-term loans at zero interest. It will offer funds to banks that extend green and sustainability-linked loans, as well as invest in green bonds and sustainability-linked bonds. The Bank of Canada announced that it will reduce the amount of weekly asset purchases from CAD 3bn to CAD 2bn and left rates unchanged at 0.25%. It stated that the taper reflects progress towards a recovery and increased confidence in the strength of the Canadian economic outlook. The Reserve Bank of New Zealand will halt its NZ$100bn ($70bn) bond buying program by July 23rd while leaving the reference interest rate at 0.25%.
The European Union proposed a 55% cut in CO2 emissions from cars by 2030 vs. 2021 levels and a 100% cut in CO2 emissions by 2035 which would translate into an effective ban on the sale of new petrol and diesel cars by then. To support EV sales, Brussels also proposed the installation of public charging points no more than 60 kilometers (37.3 miles) apart on major roads by 2025 with 3.5 million stations by 2030, rising to 16.3 million by 2050. The Commission's proposals will need to be negotiated and approved by EU member states and the European Parliament.
US June retail sales came in strong at +0.6% m-o-m, above expectations at -0.3% and compared to a revised-down decline of -1.7% in May. The retail sales control group (all sales, excluding auto dealers, building-materials retailers, gas stations, office supply stores, mobile homes and tobacco stores) came in at +1.1% m-o-m, vs. expectations of +0.4% and a May drop of -1.4% (revised down as well). The Michigan consumer sentiment came in at 80.8, compared to expectations at 86.5 and a June reading at 85.5.
China economic data
China Q2 GDP came out at 7.9% vs. consensus expectations of 8%. Other June data came out strong with retail sales beating expectations at 12.1% vs. consensus of 10.8% and Industrial Production at 8.3% vs. 7.9% consensus. There was also stronger-than-expected trade data with June exports up by 32.2% in USD terms (vs. 23.0% expected) and up from 27.9% in May, which subsequently pushed the world’s second biggest economy’s trade surplus up to its highest since January, at $51.53bn (vs. $44.75bn expected).