US inflation concerns retreat in July
18-07-2022
George Lucas, Raiz Group CEO
I thought we would begin with some good news. In the US, there were developments on the inflation front, which some consider as positive, with a July inflation expectation report — it looks at where people see prices rising in the future — falling to 2.8% over a five-year horizon, down from 3.1% in June and a one-year low.
The report is a positive signal given fears inflation could cause higher than anticipated US Federal Reserve rate hikes. This fear of rate hikes has been a main driver of the current market rout. Hence, news that inflation expectations are falling was welcomed by the market.
Also upbeat were US retail sales numbers. They beat market expectations, rising by 1% for the month of June and giving hope that the US consumer is still spending. The figures suggest the US economy remains strong enough to survive the current rate hikes from the US Federal Reserve.
While the focus of investors may have shifted from high inflation to slowing growth since mid-June, the retail sales release suggests the US consumer is not slowing down.
In fact, the data was in line with the US jobs report released over a week ago, which showed no signs of slowing employment. It is hard to imagine a full-blown recession when so many people have a job. Still, anything is possible
In Australia, a similar trend is evident, with the jobless rate falling from 3.9% to 3.5% in June.
Price of gold dips to multi-month low
After remaining at a high level for much of the pandemic and surging around the time of Russia’s invasion of Ukraine, gold prices have fallen by more than 15% from an early-March peak.
Part of the fall may be due to the sharp US dollar rise. A rise in the US dollar, all else being equal, boosts the price of gold in terms of other currencies, curbing demand from non-US based investors.
Euro falls below parity with US dollar
Other big news was the fall of the Euro below parity with the US dollar for the first time in almost 20 years, with the currency hit by increasing recession fears in the eurozone. Putting it in context, the euro has fallen nearly 20% since its peak in June 2021, and around 5% in the past three weeks alone.
One of many factors driving the euro lower is interest rate differentials. The interest rate difference between the eurozone and the US. This difference has continued to widen as the prospects for economic growth, and therefore tighter monetary policy, in the US and Europe have diverged.
There’s also ongoing concerns about Europe’s energy supply and the rapid deterioration of the region’s terms of trade, which have put significant downward pressure on the Euro.
This view is supported by the latest fall in the EUR/USD rate, from 1.06 at the end of June to 1.00, which started when the price of natural gas in Europe surged again. Notably, there are growing concerns that some parts of Europe will be forced to ration gas in the winter.
So looking ahead, it is more likely that the eurozone, as opposed to the US, will head into recession.
China reports sluggish GDP data
In China, data released last week claims that economic growth in Q2 was slightly higher than a year ago. GDP in the Asian superpower expanded by just 0.4% in the three months to June, compared with the same period last year, according to the country’s equivalent of the National Bureau of Statistics (NBS).
The weak GDP report has increased speculation that the policy makers will release hundreds of billions of dollars of stimulus into the Chinese economy in a bid to boost activity.
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