Cheaper gasoline will not solve Fed's inflation problem

Market movers today

The most important data release of the day will be the US July CPI. Following the recent decline in gasoline prices, consensus is expecting headline CPI growth to ease to 0.2% m/m (8.7% y/y). Fed will focus especially on the core inflation, where consensus is looking for a slight moderation to 0.5% m/m as fading supply chain challenges have likely eased price pressures on goods. Even though headline inflation is likely to moderate over the coming months, we continue to see risks tilted towards inflation surprising to the upside.

Inflation data will also be released for Norway and Denmark, and the revised final CPI will be released for Germany. Fed's Evans and Kashkari will be on the wires in the evening.

The 60 second overview

Natural gas: The UK government prepares for a worst case scenario of power shortfall over the winter. In this scenario, which builds on assumptions of lower than normal temperatures and reduced imports from Norway and France, UK could see a shortfall of around one sixth of peak demand. 

China: Inflation in China rose to 2.7% in July - the highest level of inflation in two years.

Equities: Oil prices continued to dictate the way for equity markets on Tuesday. As Russia said oil flows from the Druzhba pipeline had been suspended, oil prices turned volatile. This also sent equity markets into a risk-off rotation. Investors bought into value defensives and selling the July winning growth cyclicals. Volatile session ending with Dow -0.2%, S&P 500 -0.4%, Nasdaq -1.2% and Russell 2000 -1.5%.

FI: It is big inflation day today with the release of US CPI for July, final CPI-data for Germany as well as inflation data from both Denmark and Norway.

Inflation in the US is expected to decline modestly, but not enough to dampen the speculation regarding a 75bp rate hike at the Fed meeting in September after the strong labour market report last week. Hence, the curve flattening is likely to continue.

FX: CHF and EUR rose vis-à-vis CAD, JPY and AUD yesterday in a relatively steady FX market. EUR/USD rose back above 1.02, EUR/NOK stayed below 10.00 and EUR/SEK below 10.40.

Credit: Credit spreads widened slightly yesterday in response to the overall weaker risk sentiment. iTraxx Main was wider by 3bp to 103bp, while Crossover widened 14bp to 519bp. The primary market saw modest issuance activity in USD and GBP yesterday, while the EUR market remains quiet reflecting the usual seasonal pattern.

Nordic macro

Denmark. We expect Danish July CPI inflation declined slightly in July to 8.0% from 8.2% in June. The decline comes from the falling oil prices we have seen through July, which have pulled gasoline prices lower. Other energy prices such as gas and electricity on the other hand have continued to increase. In July we have several jokers which increases uncertainty. Food prices is a big joker every month. We expect another large increase, although smaller than in the previous months. Global food prices have declined over the summer, which could stop the consumer price surge later this year. Besides food, vacation related prices and the size of the summer clothing sale are the biggest July jokers.

Norway. Norwegian core inflation continues to rise on a combination of higher imported prices for everything from food to furniture, and domestic prices driven by higher labour costs, transport costs, energy costs, etc. In recent months, the seasonally adjusted core inflation has been around 0.3-0.4% m/m, and at the same time we know that food prices presumably rose abnormally much as a result of the agricultural settlement and that air fares were strongly affected by the strike in SAS. Hence, we expect that core inflation accelerated slightly in July, and was somewhat higher than last year. We therefore believe that core inflation rose further to 3.8% y/y in July. In that case, it is well above Norges Bank's estimate of 3.2% from the monetary policy report in June, and will thus provide ammunition to the market, which is currently pricing in around 42bp at the rate meeting next week.

Sweden. Production value index (PVI) and data on household consumption for the month of June is due for release today. Both are important inputs to the GDP estimate for Q2, which Statistics Sweden's GDP-indicator estimates at 1.4% q/q. As Swedish manufacturing still holds up well according to survey-based indicators the former could corroborate the GDP-indicator's estimate. As for household consumption, retail sales fell 1.2% m/m during June, so risks might be tilted towards a weaker print.