Dollar Dips Slightly on PCE Core, But Overall Market Reactions Subdued

Dollar dips slightly in early US session, following the release of May’s PCE core inflation data. This Fed’s preferred measure of inflation indicated a continued, though modest, progress in disinflation. However, the financial market’s response to the report was overall relatively muted, as the figures aligned closely with expectations.

While the data is encourage, it is unlikely to prompt rate cuts from Fed yet. Fed officials have indicated that they require more consistent data over several months to justify such a move. Moreover, they emphasize the need for widespread disinflation. With services price growth still running at an annual rate of 3.9%, there remains significant ground to cover before Fed would feel comfortable easing monetary policy.

In the broader currency markets, Australian Dollar emerged as the strongest performer for the week, bolstered by today’s rebound. It was followed by Euro and British Pound. On the other end of the spectrum, Swiss Franc was the weakest performer, followed by New Zealand Dollar and Japanese Yen. Both US Dollar and the Canadian Dollar were positioned in the middle, with the latter showing little reaction to Canada’s GDP data.

In Europe, at the time of writing, FTSE is up 0.19%. DAX is up 0.15%. CAC is down -0.83%. UK 10-year yield is down -0.006 at 4.123. Germany 10-year yield is down -0.002 at 2.452. Earlier in Asia, Nikkei rose 0.61%. Hong Kong HSI rose 0.01%. China Shanghai SSE rose 0.73%. Japan 10-year JGB yield fell -0.0254 to 1.048.

US PCE core inflation slows to 2.6% as expected in May

In May, US PCE price index was flat mom, matched expectations. PCE core price index (excluding food and energy) rose 0.1% mom. Both matched expectations. Prices for goods fell -0.4% mom while prices for services rose 0.2% mom. Food prices rose 0.1% mom while energy prices fell -2.1% mom.

From the same month one year ago, headline PCE price index slowed from 2.7% yoy to 2.6% yoy. PCE core price index slowed from 2.8% yoy to 2.6% yoy. Both matched expectations. Goods prices were down -0.1% yoy while services prices were up 3.9% yoy. Food prices were up 1.2% mom and energy prices were up 4.8% yoy.

Also, personal income rose 0.5% mom or USD 114.1B, above expectation of 0.4% mom. Personal spending rose 0.2% mom or USD 47.8B, below expectation of 0.3% mom.

Fed’s Barkin: Economy not ready for rate cuts despite expectations

Richmond Fed President Thomas Barkin highlighted the divergence between expectations and reality of US monetary in a speech today. He noted, “Most anticipated we would be cutting rates by now, either because we returned inflation to target, or perhaps because the economy took a turn for the worse. Yet, in contrast to the European Central Bank, that has not yet been the case.”

Barkin elaborated on the unique challenges facing the US economy, emphasizing that monetary policy operates with “long and variable lags.” He suggested that these lags might be longer than expected due to factors such as labor hoarding, excess savings, delayed exposure to interest rate hikes, and newfound pricing power among businesses.

Furthermore, Barkin raised the possibility that the Fed’s rate hikes might not be constraining the economy as much as anticipated. He pointed to the concept of r-star, the neutral real rate of interest, suggesting it might have shifted to a higher level. “It is too soon to tell, but there’s one way to find out: Proceed deliberately while keeping a close eye on the real economy. And that’s what I am doing,” Barkin stated.

Canada’s GDP grows 0.3% mom in Apr, matches expectations

Canada’s GDP grew 0.3% mom in April, matched expectations. Both goods-producing (+0.3%) and services-producing (+0.3%) industries contributed to the growth with 15 of 20 sectors increasing in the month.

Advance information indicates that real GDP rose 0.1% mom in May. Increases in manufacturing, real estate and rental and leasing and finance and insurance were partially offset by decreases in retail trade and wholesale trade.

ECB’s Villeroy: Confidence grows in inflation forecasts as data surprises diminish

ECB Governing Council member François Villeroy de Galhau expressed increased confidence in the inflation forecast today, noting that the frequency of data surprises has diminished.

“As data surprises are now smaller and revisions to the current assessment more minor compared to two years ago, we are gaining more confidence in the forecast and more scope to disregard smaller bumps in the disinflation process,” he said.

ECB projects inflation to remain above its 2% target for the rest of this year. However, it anticipates that inflation will start easing next year and reach the 2% target by the end of 2025.

Swiss KOF rises slightly to 102.7, gradual recovery continues

Swiss KOF Economic Barometer rose from 102.2 to 102.7 in June, surpassing expectations of 100.5. According to KOF, the Swiss economy is projected to “continue to recover little by little over the coming months.”

This increase is largely driven by a more favorable outlook for foreign demand. Additionally, the hospitality industry is expected to see stronger benefits. The indicators for manufacturing, construction, and private consumption remained virtually unchanged in June. However, the outlook for financial and insurance services, along with other service sectors, has slightly dimmed.

Tokyo CPI surpasses expectations, Japan’s industrial output rebounds

Japan’s Tokyo CPI core (excluding food) rose to 2.1% yoy in June, beating expectations of 2.0% yoy and up from May’s 1.9% yoy. CPI core-core (excluding food and energy) increased from 1.7% yoy to 1.8% yoy. Headline CPI also ticked up from 2.2% to 2.3% year-on-year. Monthly figures showed Tokyo’s CPI core rose by 0.4% mom, core-core by 0.3% mom, and headline CPI by 0.3% mom.

In addition, Japan’s industrial production saw a significant boost in May, rising 2.8% mom, surpassing the forecasted 2.0%. Of the 15 industrial sectors covered, 13 reported higher output while only two experienced declines.

A Ministry of Economy, Trade and Industry official noted, “The private sector’s sentiment toward output is improving as auto production started to pick up.” Despite this, the ministry maintained its previous assessment that industrial production “showed weakness while fluctuating indecisively.” According to a poll of manufacturers, output is expected to decrease by -4.8% in June but increase by 3.6% in July.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 160.43; (P) 160.63; (R1) 160.98; More…

Intraday bias in USD/JPY is turned neutral again with current retreat. Some consolidations could be seen first and deeper pullback cannot be ruled out. But near term outlook will remain bullish as long as 157.70 resistance turned support holds. break of 161.27 will resume larger up trend to 161.8% projection of 151.86 to 157.70 from 154.53 at 163.97.

In the bigger picture, there is no sign of long term trend reversal yet. Further rally is expected as long as 151.86 support holds. Decisive break of 160.02 will target 100% projection of 127.20 to 151.89 from 140.25 at 164.94.

Economic Indicators Update