The US economic cycle will continue as the US consumer remains strong and inflation continues struggle. The US economy continues to grow at a solid pace and the better than expected data should give the US dollar a little momentum as investors price in less Fed rate cuts in the short-term. Next week’s argument for a 50-basis rate cut has gone in up in smoke, not because of the strong US data, but because both the measure of overall inflation and core prices posted significant gains.
This Fed easing cycle is looking just like the one in the 90s and we should primarily focus on the overall trend with inflation and that is not going anywhere anytime soon. Powell and company will likely do everything they can to avoid becoming Japan and we could start seeing markets price in a full percentage point of rate cuts over the next year.
Today’s German import price data solidifies deflationary pressures are hitting the eurozone’s largest economy. With exports also continuing their downward trend, we could be in for much weaker German data in the third quarter than what was initially expected.
The ECB Survey of Professional Forecasters lowered inflation expectations to the surprise of no one. Deflationary and recessionary concerns will remain the fuel to the ECB’s fire in delivering a firework’s display of easing in September.
The markets are still processing Mario Draghi’s press conference, but the general conclusion is that September will see a plethora of steps taken by the ECB that will coincide with new stimulus coming from the Americas. The eurozone outlook is getting worse and worse so we could still see the euro stuck in a frustrating range as ECB efforts will only be countered by the Fed’s start to an easing cycle.
Energy prices remained near session highs following the release of US GDP, as the US consumer continues to spend and business investment slides. The US economy is strong and more importantly for energy prices, so is the US consumer. Demand outlooks will slowly start to improve as we will see a lot of a lot of the doomsday scenarios disappear. Fresh stimulus from the Fed and eventually the ECB will do a lot to bolster up demand from two key regions in the world and that should start to provide strong support for energy prices.
Gold prices pulled back after the advance reading for second quarter GDP topped estimates. Gold however should see buyers emerge as the Fed is coming with rate cuts because inflation risks are too high. Fed officials are looking at negative rates in Europe and Japan and they can afford several cuts to avoid deflationary pressures. Inflation is going nowhere and the yellow metal should still benefit despite upside surprises to US economic data.
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