Core PCE inflation metric ahead

A weak start in Europe this morning follows a largely positive US session that saw both the S&P 500 and Dow hitting fresh record highs. With Nvidia regaining much of the 5% decline originally slated in pre-markets, traders instead looked towards improved GDP data to lift sentiment over the state of the economy. A 3.3% annualised growth figure for Q2 came in above the first estimate of 3%, with declining jobless claims also helping ease the narrative of a worsening US economy. Nonetheless, key indices such as the FTSE, DAX, and CAC are trading lower in Europe, with that divergence partially reflecting the growing political concerns in France.

In the UK, bank shares are under renewed pressure amid mounting concerns over a possible windfall tax. Talk of increased taxation on major banks has weighed heavily on investor sentiment, with the IPPR think tank proposing a “Thatcher style tax of bank windfalls” as a means to bridge the gap currently faced ahead of the Autumn budget. While this suggested tax may not come to fruition, the circa 4% declines seen for NatWest, Lloyds, and Barclays serves to highlight the detrimental effect this recent period of tax speculation has had on UK sentiment.

All eyes now turn to today’s release of the US core PCE inflation figure, with the Federal Reserve’s preferred inflation gauge expected to rise about +0.2% month-on-month (2.9% YoY). We have seen relative stability over the course of this week around the pathway for US rates, although that may change if we see a significant uptick in price pressures. Coming ahead of a week that markets predict will bring a raft of worsening jobs metrics, a subdued core PCE figure today would provide the basis for a confident dovish stance from the Fed going forward.