Archive

HEM: Punch Drunk Doves

• Weaker activity is providing doves with an excuse to cut
• Fed pricing is overextending the limited easing required
• Underlying wage inflation remains excessive
• Premature stimulus can blow bubbles like in 1998
• We still see a risk of rate hikes in 2025 to reverse cuts

EA: Inflation Drift Risks Drowning Cuts

• EA inflation exceeded consensus expectations by 0.2pp as it increased to 2.6% y-o-y in July but was within 1bps of our forecast as our surprises were less and offsetting.
• Further resilience in services inflation kept the core at 2.9%, demonstrating upside news in the less volatile areas more reflective of domestic conditions.
• Forecasts for July have been trending higher, challenging the ECB narrative where stability permits cuts. September remains likely, but the cycle could be doused swiftly.

By Philip Rush

EA GDP Growth Steadier Than Surveys

• Euro area GDP growth remained at 0.3% q-o-q in Q2, defying expectations for it to slow like the surveys. Germany’s surprise fall may disappear as actuals replace estimates.
• Sustaining something close to potential growth without a shallow recession to recover suggests cyclical pressures are stable, like the unemployment rate.
• Effective monetary conditions do not currently look tight in the Euro area. Rate cuts to offset belated passthrough are inherently more limited and at risk of reversal.

By Philip Rush

PMIs Persist Past Softening Seasonals

• The PMIs proved surprisingly resilient in the flash releases for July, especially in the US where its already high level pushed up further rather than converge down to its peers.
• Residual seasonality should be depressing the activity data, as appears to have occurred in the EA. Other US data softened, including the ISM, leaving the PMI as an outlier.
• Central banks seem set to conclude that policy is still tight amid broader softening signals. Indeed, we still expect the Fed to start a short rate-cutting cycle in September.

By Philip Rush