Dollar Falls on U.S. Inflation Report

The dollar index (DXY00) Friday fell -0.42% on the slightly softer-than-expected U.S. deflator report, which might cause the Fed to be a little less hawkish.  The dollar was also undercut by the lackluster U.S. personal spending report. 

EUR/USD (^EURUSD) rose +0.39%.  USD/JPY (^USDJPY) fell -0.33% as Japanese officials continued to threaten FX intervention to address the yen’s chronic weakness.

Friday’s May PCE deflator, the Fed’s preferred inflation measure, rose +0.1% m/m and +3.8% y/y, which was in line with market expectations.  The May core PCE deflator rose +0.3% m/m, which was in line with market expectations, but the May core PCE deflator on a year-on-year basis rose by +4.6%, which was slightly weaker than market expectations of +4.7%.

The deflator report showed that inflation is going in the right direction, with the headline deflator easing to +3.8% y/y from April’s revised +4.3%, and the core deflator easing to +4.6% y/y from April’s +4.7%.  Still, the Fed will remain worried about sticky core inflation, with the core deflator still at a very high +4.6% y/y, far above the Fed’s +2% inflation target.

May U.S. personal income rose +0.4% m/m, slightly stronger than expectations of +0.3%, although April was revised lower to +0.3% m/m from +0.4%.  May U.S. personal spending rose by +0.1% m/m, slightly weaker than expectations of +0.2%, and April was revised lower to +0.6% m/m from +0.8%.  May real personal spending was unchanged m/m after a revised +0.2% m/m increase in April.

The final-June University of Michigan U.S. consumer sentiment index was revised higher by +0.5 points to a 4-month high of 64.4, stronger than expectations for no revision. The revision left the index up by +5.2 points from May’s level of 59.2.

The markets are discounting the odds at 81% for a +25 bp rate hike at the next FOMC meeting on July 25-26.  The markets are anticipating a peak funds rate of 5.42% by November, which indicates that the market is discounting an overall rate hike of +33 bp through November from the current effective federal funds rate of 5.07%.

China’s PMI reports overnight were roughly in line with market expectations but reinforced the view that China’s economy is losing steam after an initial post-Covid boom. China’s June manufacturing PMI rose +0.2 points to 49.0, which was in line with market expectations but remained below the expansion-contraction level of 50.  China’s June non-manufacturing PMI fell -1.3 points to 53.2, weaker than market expectations for a decline to 53.5.

The June Eurozone CPI report of +0.3% m/m was in line with market expectations.  The June CPI on a year-on-year basis eased to +5.5% y/y from May’s +6.1% y/y and was slightly weaker than market expectations of +5.6%. The June core CPI rose slightly to +5.4% y/y from May’s +5.3% but was slightly weaker than market expectations of +5.5% y/y.

The May Eurozone unemployment rate was unchanged from April at 6.5%, in line with market expectations.

August gold (GCQ3) Friday closed up +11.5 (+0.60%), and Sep silver (SIU23) closed up +0.222 (+0.97%).  Precious metals prices saw some support from the slightly dovish U.S. deflator report. Silver saw support from the rise in the U.S. consumer sentiment index to a 4-month high.

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