Weekly focus – Rising production costs have yet to reach consumers

In a week with higher volatility and some defensive rotation in the stock market, 10Y sovereign bond yields have traded lower. Oil prices have been remarkably steady with Brent trading around USD105 per barrel, while European natural gas prices have continued higher ahead of the heating season. Prices around EUR87/MWh are the highest in almost four years.

US CPI was the key data point this week. Inflation increased to 3.7%, a bit higher than consensus driven largely by energy prices but not entirely. Core inflation was 0.3% m/m for the second month in a row, indicating some signs that underlying price pressures have increased. Higher shelter prices were a big part of the story, though, while core goods inflation was only slightly on the high side.

Producer prices paint a similar picture. Core PPI inflation was higher than expected at 5.0% but still with very limited signs of broadening price pressures. The deteriorating consumer sentiment was reflected in private spending in September as core retail sales increased by a modest 0.1% m/m.

Ahead of the data releases, several FOMC members voiced some patience with regard to further rate hikes. Warsh himself gave no hint of the October policy decision at the IMF annual meetings in Bangkok. At least for a while, investors put October back in the game as the timing of a next possible rate hike. We continue to see December as the most likely timing.

In Europe, the final September inflation print confirmed the very modest spillover from energy prices to other goods and services with LIMI (low import intensity) inflation still lower than before the Iran war and energy sensitive inflation even heading lower.

Meanwhile, China is becoming an increasingly more inflationary force in the global economy with PPI inflation reaching 5.0%, which is the highest since 2022. As opposed to the situation in the US, PPI inflation in China is more broadly based and driven not only by energy. Microchips are the key driver, and the higher prices are being exported at an even faster pace, with export growth reaching 36.3% in September, surpassed only once since the pandemic caused major volatility in trade data. CPI inflation on the other hand remains a modest 1% on the back of weak consumer demand.

Next week is PMI-week. Here it will be interesting to see if the big global economies continue to outperform expectations. In the UK and Japan, September inflation will be released, potentially adding more pressure on their respective central banks to hike rates.

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