Insights
The U.S. inflation continued to ease in August, as reported by the Bureau of Labor Statistics on September 11. The Consumer Price Index (CPI) increased by 2.5% year-on-year (previously 2.9%), with a monthly increase of 0.2% (unchanged from 0.2% in July). The core CPI, which excludes food and energy, remained steady with an annual increase of 3.2% (same as the previous 3.2%), and a monthly increase of 0.3% (up from 0.2%).
Breaking down the data, the decline in the annual CPI growth rate was largely driven by a reduction in energy prices, benefiting from last year’s high base effect. Energy prices fell 4% year-on-year (previously up 1.1%). However, core CPI, excluding food and energy, remained unchanged, primarily due to a rebound in housing services prices. The annual growth rate of housing services prices increased to 5.2% in August (up from 5.1%), with a monthly increase of 0.5% (up from 0.4%).
Housing prices have consistently been the largest impediment to the decline in core CPI. However, due to the recent slower pace of reduction, the market now anticipates an 85% probability of a 25-basis-point rate cut in September (up from 66% prior to the release of the CPI data). Moreover, the market expects a total of four rate cuts throughout 2024, with one in September, two in November, and one in December.
Insights
China’s CPI recorded positive growth for the seventh consecutive month, rising by 0.6% year-on-year in August, up from 0.5% in the previous month, as reported by the National Bureau of Statistics on September 9. However, the CPI is still below market expectations of 0.7%.
This rise was mainly driven by continuous increases in food prices driven by high temperatures and heavy rainfall, which surged by 2.8% (previously 0%), contributing 0.51 percentage points to the overall CPI growth.
However, non-food prices fell from 0.7% in July to 0.4%, and core CPI, which excludes food and energy, rose by only 0.3%, down from 0.4% in the prior month. August’s PPI reflected similar trends, with China’s PPI declining by 1.8% year-on-year, widening from a 0.8% drop in July. This marks the 23rd consecutive month of contraction, highlighting weak domestic demand and increasing deflationary risks.
Insights
Last week, a series of U.S. employment data fueled concerns about a potential economic recession, causing the S&P 500 to drop 4.2%, marking its worst weekly performance since January 2022. U.S. 2-year and 10-year Treasury yields fell, reflecting market expectations of a more aggressive rate cut path for the rest of the year, with the 10-year/2-year Treasury yield spread turning positive. The U.S. dollar index also declined as expectations for more significant Federal Reserve rate cuts rose. Below is a recap of key economic data from last week:
Insights
As the unwinding of yen carry trades came to an end, the market returned to a more stable state, though it remains highly sensitive to economic data. The S&P 500’s gains narrowed due to underperformance in some tech stocks, while it also faced the challenge of reaching new highs. Meanwhile, U.S. 2-year and 10-year Treasury yields edged higher due to shifting expectations around rate cuts, though the overall yield spread narrowed to a range of -10 to 0 basis points. The U.S. Dollar Index also saw a slight increase, driven by reduced expectations of rate cuts from the Federal Reserve.
Insights
The Japanese Ministry of Internal Affairs and Communications (MIC) released the consumer price data on August 22, showing that the July CPI increased by 2.8% year-over-year, the same as the previous month, and slightly above market expectations by 0.1%.
This sustained growth was mainly due to a significant rise in electricity and gas prices, which drove energy prices up by 12.0% (compared to 7.7% the previous month). However, the year-over-year increase in fresh food prices fell to 4.2% (down from 8.2% the previous month), offsetting some of the overall increase.
The core CPI, which excludes fresh food, increased by 2.7% year-over-year, slightly higher than the previous month’s 2.6%, marking the 28th consecutive month above the Bank of Japan’s 2% inflation target. Further excluding energy, the double core CPI rose by 1.9%, down by 0.3% from the previous month, marking the first time it has fallen below 2% since September 2022.
At the end of July, the Bank of Japan unexpectedly raised interest rates by 15 basis points, causing significant market volatility. Subsequently, the Bank of Japan Governor stated that there would be no rate hikes during periods of market instability. However, according to the latest Shunto negotiations, Japanese wages saw the largest increase in 33 years (5.33%).
Simultaneously, on August 20, the Bank of Japan published two reports on the impact of demographic changes on wage structures and the impact of service inflation on overall CPI.
This appears to signal that the Bank of Japan may continue to raise rates in response to the persistence of service inflation. The market currently expects the Bank of Japan to maintain rates unchanged in September but anticipates another rate hike before the end of the year.