Market Update

This week, our primary focus was on Wednesday's (August 10, 2022) US CPI inflation report, particularly in light of the strong US employment data from the previous week. This robust employment data had led financial markets to speculate and price in the possibility of a 0.75% increase in US interest rates before the Federal Reserve's scheduled meeting on September 21, 2022.
As we have previously expressed, our primary concern is that central banks might raise interest rates too rapidly and excessively, potentially causing a sharp economic slowdown.
Fortunately, Wednesday's inflation report alleviated our concerns and completely reversed market sentiment. Financial markets are no longer anticipating an interest rate hike between meetings. Instead, they now consider a 0.5% rate increase more likely, and some even envision the possibility of rate cuts late next year.
The headline CPI inflation figure for July fell to 8.5% from 9.1% in June, partly due to a significant decline in petrol prices. Notably, the core CPI reading, which excludes volatile items like food and energy, remained unchanged at 5.9%, contrary to economists' expectations of an increase above 6.0%. This stability in core inflation suggests that the decline in petrol prices is not solely responsible for the cooling in inflation.
Furthermore, the US PPI inflation reading, which measures inflation from a producer's perspective, also provided assurance that CPI inflation in the US may have reached its peak. The core PPI reading decreased to 7.6% in July, down from June's 8.4%.
In other economic news, the UK's Q2 GDP report revealed a 0.1% contraction in the economy. While this was disappointing, it fared better than economists' predictions of a 0.2% contraction.
Given this economic contraction and the impending exacerbation of the cost-of-living crisis, particularly with the energy price cap set to increase in October and news about the government's preparations for potential organized blackouts in January, the Bank of England (BOE) may have little choice, depending on the support offered by the next Prime Minister, but to reconsider its planned aggressive interest rate increases.