This week we had a two-year low for the US CPI, which fell to 3%. Core inflation fell to a lower-than-forecast 4.8% from 5.3%. More disinflation was evident as US PPI slowed to a lower-than-expected 0.1% YoY in June, from 0.9% in May. It was the weakest pace since Aug 2020 and is down from the all-time high of 11.7% from March 2022. It all looks rather encouraging and is firing up the soft landing bulls.  

But market pricing may be over-optimistic. Fed funds futures indicate another 25bps hike to 5.5% – one and done, before the central bank is seen reversing course and cutting around 6 times to 3.8% by the end of 2024. This seems wildly optimistic – if the Fed cuts that much it would be because of a hard landing. For now the market is having its cake and eating it – soft landing + multiple rate cuts. Both cannot be true.  

Next week we will be looking to the UK, where inflation is proving much harder to shake. Headline CPI inflation remained at 8.7% in May, refusing to come down as expected, whilst the core reading jumped even higher, rising from 6.8% to 7.1%, the highest since 1992.  

Wall Street rallied for a fourth day in a row after the PPI number cemented the disinflation-soft landing narrative, with the US 2yr Treasury almost hitting 4.6%, from 5% a week ago. With yields down and the dollar falling off a cliff the Nasdaq added another 1.6% and the S&P 500 rose 0.85% for fresh YTD highs. European stock markets were steady in early trading on Friday but on course for weekly gains of around 2-4%. The S&P 500 is up 2.5% for the week so far, whilst the Nasdaq has risen 3.5%. Bank earnings today, as well as the UoM consumer sentiment survey.

The dollar is catching a little relief this morning after a sharp fall this week on lower Treasury yields. GBPUSD has risen above 1.31 to scale a fresh 15-month high.