Economic Highlights

Headline inflation came in higher than expected in July, rising from 0.6% to 1%. The core rate (which had not fallen as much during Covid), jumped from 1.4% to 1.8%. The timing of summer clothing sales (which a jump in fuel prices appear to have been the main contributors. There is some evidence of “cost push” inflation, for example in men’s haircuts (+6.1%) to reflect the cost of installing PPE, but any such spending should be seen as a one-off rather than the beginnings of a higher trend. Core Retail Sales (+3.1% y/y) confirmed the bounce back in the economy and also, perhaps, the unleashing of some pent-up demand.

One key feature of the US economy has been the resilience of the housing market. No doubt this has been helped by bond yields helping to push mortgage rates (which are priced off the 30-year Treasury yield) to all-time lows. Last week saw firm prints for both Housing Starts (1,496,000) and Building Permits (1,495,000). This is one leg of the economic stool that looks firm, which is very different to the experience of the financial crisis.

There was some loss of momentum in the latest Purchasing Manager Indices. The Euro Area Composite PMI fell from 54.9 to 51.6 in August, with Germany (53.7 vs 55.3) and France (51.5 vs 57.3) both falling back. This probably reflects the effect of increased localised lockdowns and some voluntary reduction in mobility as case numbers rise again. However, we remain wary of putting too much weight on PMI data in the short term owing to the methodology.