US inflation below expectations.

There are no big fluctuations to note among the major currencies this week. The euro-dollar parity has moved within a narrow 40–basis point range centred on USD 1.18 in the past few days. The greenback also seems pinned to the Swiss franc and remains around CHF 0.92. Last Thursday, the vice-president of the Swiss National Bank reiterated the institution’s well-known position that the Swiss franc is still overvalued and that the SNB will not shrink from inflating its balance sheet to keep it from appreciating. Inflation and negative interest rates were also discussed. The jump in prices has been deemed transitory in Switzerland. Most central banks in the developed world share this position. As for negative rates – which we’ve had since January 2015 – the SNB still believes they are necessary. Per the vice-president, raising interest rates would cause the Swiss franc to appreciate, economic growth to slow down and employment to increase.
After nearly six months of decline, the EUR/CHF has been recovering in recent weeks, supported by the prospect of tapering by the European Central Bank. The market believes that the ECB will soon move towards normal monetary policy, even if it will remain accommodative for a very long time. Still, the euro has not managed to rise above CHF 1.09 for long. This week, the ECB declared, as expected, that it would reduce its emergency bond purchases over the next quarter. The bank has been buying around €80 billion of debt each month since the beginning of the year. While the ECB did not give any numbers for the next three months, monthly purchases are expected to decrease to between €60 and €70 billion. Concerning growth, the ECB raised its 2021 estimate for the eurozone GDP to 5.0% from 4.6%. It also raised its eurozone inflation forecast for 2021 to 2.2% from 1.9%. Christine Lagarde once again sought to reassure the markets and postponed important decisions on the future of the pandemic emergency purchase programme (PEPP) until December. For the time being, it is still scheduled to end in March 2022. The SNB, on the other hand, is not expected to change its monetary policy in the short term: with unemployment low and inflation below the 2% target, it is comfortable with its current policy. The difference in outlook between the ECB and the SNB is therefore acting as a support for the EUR/CHF parity in the medium term.
The pound sterling, on the other hand, has experienced more volatility. Towards the end of last week, it swung up by 100 basis points on 8 September alone, buoyed by statements from the Governor of the Bank of England. The Governor had suggested that conditions were ripe for a rate hike soon. The market expects this hike to come in the first half of 2022, earlier than in the US. However, the pound fell by 100 basis points yesterday, losing much of its gains.
The Central Bank of Russia, among the most hawkish in the world, decided to raise its key rate by 25 basis points to 6.75%. The market consensus was for an even larger increase of 50 basis points. After a sharp hike of 100 points in July, this is the fifth consecutive increase. The current level actually corresponds to annualised inflation.
On the other side of the Atlantic, the US Labor Department released inflation figures yesterday. Prices increased less than expected in August (0.3% against 0.5% in July). The market was expecting a rise of 0.4%. Inflation even slowed down over the year (5.3% compared to 5.4% in July) for the first time since October 2020. Core inflation, which excludes food and energy prices, was the lowest since February at just 0.1%. These figures suggest that price rises have reached a plateau, supporting analysts who believe that high inflation is likely to be transitory. Inflation was driven by petrol, furniture, food and housing prices. Used car prices fell for the first time since February after having risen in the spring. Air fares are also down, with the Delta variant again limiting travel. In the United States, tapering is expected to start this year. The real question is whether or not the Fed will raise interest rates starting in 2022. The market expects inflation to fall gradually but does not see it falling below the 2% target in the medium term.
In China, disappointing economic figures released yesterday raised concerns about the country’s economic recovery. The National Bureau of Statistics reported a year-on-year increase in retail sales of only 2.5% – well below the 8.5% increase seen in July. This figure had not been so low since September 2020. Industrial production also grew at a slower pace than in the previous month (+5.3% compared to +6.4%). And, for once, global stock markets have been on a downward trend for several days. The spread of the Delta variant and lacklustre performance in Asia are dampening the mood, and in the US, the Biden administration’s plans for tax increases are causing concern.
In commodities, aluminium reached a 13-year high after surpassing $3,000 per tonne. The military coup in Guinea has sharply reduced supply while demand continues to grow. Gold stopped its decline and returned to $1,800/oz. The price of copper is down after the settlement of labour disputes that blocked mines in Chile, the world’s largest producer. Oil is rising as production in the Gulf of Mexico is still limited by about half due to Hurricane Ida. The OPEC, in the interest of supporting the recovery in global consumption while keeping prices up, is being careful to reopen the tap very gradually.