*The FED´s preferred inflationary indicator, the consumer spending deflator, fell to its lowest level in over two years. However, the underlying component remains reluctant to decline.
*General inflation in the Eurozone decreased more than expected, but the underlying component marginally accelerated.
*China´s PMI´s show further weakening in economic activity during June.
PCE inflation in the US remained in line with estimates during May; the underlying component raises concerns. The consumer spending deflator logged 0.1% monthly and 3.8% annual readings, which point to a slowdown compared to the previously logged 0.4% monthly and 4.3% annual figures (April), in line with market forecasts. The underlying indicator also recorded a slight slowdown, dropping from 0.4% m/m in April to 0.3% m/m in May. Even on an annual basis, it marginally surprised to the downside by logging a 4.6% year on year figure, slightly lower than the consensus estimate of 4.7%, which analysts expected to remain in place for a second consecutive month. Overall, while the consumption PCE deflator continues to move in the right direction – and reached its lowest level since April 2021 – the underlying component has been “stuck” at high levels (around 4.6%) since December of last year. With this, the FED´s preferred inflationary indicator suggests the need for further tightening in the United States´ monetary policy, which could happen as soon as July 25th-26th. In this regard, the Chicago Futures Market has an 85.6% probability of a 25 base point increase being carried out in said monetary meeting – which would place the federal funds rate in a range of between 5.25% and 5.50%, a level that would remain in place throughout the rest of the year. Lastly, consumer spending moderated significantly by logging a 0.1% monthly figure in May.
Consumer inflation in June surprised to the downside, but the underlying component remains reluctant to decline. According to Eurostat preliminary figures, general inflation recorded a 5.5% annual figure in June, its lowest reading since January 2022 and marginally lower than the consensus forecast of 5.6%. This moderation is mainly explained by the sharp decline in energy prices, which logged a -5.6% annual figure; although there was also a slight moderation in the food, alcohol, and tobacco category (from 12.5% y/y in May to 11.7% y/y). With this, despite general inflation continuing to moderate its pace from its 10.6% peak reached in October of 2022, the focus has shifted to the underlying component, which has shown little progress in the past 9 months, remaining anchored in a range of between 5.0% and 5.7% y/y, even logging slight acceleration in June, reaching 5.4% y/y from the previous 5.3% reading. The services category has accelerated its price variation from 4.4% y/y in January of this year to 5.4% y/y in June. Overall, June´s inflationary figures back ECB President´s Christine Lagarde´s idea of higher rates in the future, due to the fact that general inflation is still far from its 2% target level and its moderation has mainly come from energy prices, while the underlying component remains reluctant to decline.
China´s PMI´s reiterate the loss of momentum in its economic recovery. June´s Composite PMI Index fell to 52.3 points, its lowest level of 2023, due to a slowdown in non-manufacturing activities (53.2 vs 54.5 prev.) and further contraction in manufacturing activities, which remained in contractionary territory for a third consecutive month (49.0 points), which reflects weak domestic and foreign demand. Additionally, both sectors logged setbacks in employment and prices. We believe that the Chinese government will need to take more decisive actions to stimulate an economic revival – in addition to the rate cuts implemented a couple of weeks ago. However, Prime Minister Li Qiang has refrained from announcing measures to accelerate demand, without detailing any specific actions, which has fueled uncertainty about the direction of the Chinese economy.