Turgid Trade As CPI & ECB Loom

WHERE WE STAND – Yesterday was not especially exciting.

I think the highlight of my day having been conducting a bit of a deep-dive into the BoE’s Gilt purchases/sales rather speaks volumes on that front.

It also proved a relatively dull day for markets, by and large. While there was plenty of headline noise – as geopolitical tensions simmer in the Middle East, and on the Polish border – as well as a brief bit of excitement over cooler-than-expected US PPI figures, there was on the whole relatively little signal to be extracted from what we saw yesterday.

In terms of that wholesale inflation data, headline PPI rose 2.6% YoY in August, well below consensus (3.3%) and the bottom end of the forecast range, while the headline index actually fell 0.1% MoM last month, the first such decline since April.

Before anyone gets carried away, though, I’d flag that the PPI calculation explicitly excludes imports from the data, hence the figure is not necessarily the valuable leading indicator for CPI that it usually is. Furthermore, the much cooler-than-expected print was driven primarily by notable MoM declines in a host of personal consumption categories, including TV & video retail (-5.6% MoM), RVs & camping (-3.1% MoM), and furniture (-7.2% MoM).

I wonder if some of these price declines might be driven by waning consumer demand, especially given the soft nature of the labour market in recent months. In any case, we get the August retail sales report next Tuesday, which will shed some more light on that, and could prove me dead wrong; ‘never bet against the US consumer’ after all!

Anyway, the PPI data doesn’t move the needle for the FOMC at all, with a 25bp cut next Wednesday still nailed on. Money markets do price a modest chance of a 50bp move, and that pricing could ramp up further if CPI is cool later today, though given upside price risks from tariffs, and uncertainty over exactly how restrictive the current policy stance is, I still expect Powell & Co to resume the easing cycle with a more modest move at the September meeting.

Stocks, quite clearly, don’t need rate cuts to rally right now. In fact, I don’t think the equity market really needs an excuse at all to gain ground, with the path of least resistance clearly leading higher, and the list of bullish catalysts still piling up – solid economic growth, strong earnings growth & guidance, corporate buybacks gathering pace, calmer tones prevailing on trade, and optimism around the AI theme having returned with a vengeance. If we were to see any wobbles in the equity space, either on a hot CPI print, or in a potential ‘sell the fact’ reaction to the September FOMC meeting, such a dip would quite clearly be a buying opportunity in my mind.

As for markets elsewhere, it proved a relatively subdued day, with rather turgid and frankly uninspiring trade seen across the board. I, hence, remain a dollar bear, gold bull, and in favour of a steeper Treasury curve, in line with my longer-run biases.

LOOK AHEAD – Today’s data docket is, mercifully, considerably busier than yesterday’s.

Last month’s US CPI figures stand as the calendar highlight, though again seem unlikely to move the needle either in terms of what the Fed will do next week, or beyond that. Whatever, headline CPI is seen rising 2.9% YoY in August, 0.2pp quicker than the pace seen in July, while core CPI should hold steady at 3.1% YoY. Of course, the core goods metric will be closely watched for further signs of tariffs being passed through in the form of higher consumer prices, though Chair Powell has already clearly indicated his preparedness to look through such pressures as a ‘one-time shift in the price level’.

Meanwhile, here in Europe, the ECB announce policy this lunchtime, with Lagarde & Co set to maintain the deposit rate at 2.00%. Along with that, the Governing Council will likely reiterate their ‘data-dependent’ and ‘meeting-by-meeting’ approach to future policy decisions, guidance that all market participants should now be extremely familiar with.

Furthermore, the latest round of staff macroeconomic projections is set to be broadly unchanged from those issued in June, again pointing to growth of about 1% in each of the next couple of years, along with a modest inflation undershoot next year, before headline HICP returns to the 2% target in 2027. Overall, the easing cycle is almost certainly done & dusted now, barring a re-escalation in trade tensions, or significant and sudden strengthening in the EUR.

Besides all that, participants might at least glance at the weekly US jobless claims stats, though neither print pertains to the survey week for the September jobs report, while the US sells 30-year bonds later this evening.