US inflation data published on Wednesday arrives at a time of rising stress in the world’s most important bond market and just before central bankers meet for their annual symposium in Jackson Hole.
US 30-year borrowing costs have risen to their highest level since 2007 in recent days, amid concerns over America’s $40tn national debt and huge amounts of AI bond issuance. Treasury secretary Scott Bessent responded this week by revealing plans to “at least” double the department’s purchases of long-term government bonds.
But at the short end of the curve, investors have cut back bets on higher US interest rates due to falling consumer price inflation and an unexpected decline in non-farm employment. Futures markets are currently pricing in a roughly one-in-three chance of an increase next month.
However, minutes of the Fed’s policy vote in July, when rate-setters held borrowing costs within a 3.5-3.75 per cent range, showed central bankers are growing worried that high inflation may become self-fulfilling as expectations of persistently rising prices become embedded in wage and price-setting decisions.
Analysts expect July’s US headline Personal Consumption Expenditures index to rise 0.1 per cent month-on-month and 3.6 per cent year-on-year, according to forecasts compiled by London Stock Exchange Group, still well above the Fed’s 2 per cent target. Annual core PCE, which strips out energy and food prices, is expected to hold steady at 3.3 per cent.
Complicating the picture, new chair Kevin Warsh has called core PCE a “sort of a rough swag as to what’s going on”. In addition, the measure is also set for an overhaul, which could lower recent readings.
For bond investors, the picture on inflation is going to be more important than the Treasury’s actions, say some analysts.
“If the Treasury tries to defend some rate level, things are going to go badly,” said Mike Zigmont at Visdom Investment Group. If inflation keeps rising, “no amount of Treasury jawboning or actual bond-buying will stem the market’s selling”, he added. George Steer
Will inflation keep the BoJ on course for a rate rise?
Markets are increasingly convinced that the Bank of Japan will accelerate its current rate-rising cycle and now has enough evidence to justify raising its policy interest rate by 0.25 percentage points at its meeting in September. All data over the next few weeks will be assessed against this new thesis.
Unless the Tokyo consumer price index, due for release on Friday, significantly undershoots consensus expectations for a modest rise to an annual rate of 2 per cent in August, up from 1.9 per cent in July, speculation around a rate rise is likely to strengthen, say analysts. Markets are currently pricing in a roughly two-thirds chance of a rate rise next month.
The BoJ struck a hawkish tone at its meeting in July and any repeat of that language during a scheduled speech to regional business leaders by the BoJ’s deputy governor, Ryozo Himino, on Thursday could also be taken as evidence that a rate increase is imminent.
After massive intervention by the US Treasury and Japanese finance ministry to support the yen in late July, many in the market believe the BoJ is now under moral pressure to raise rates and “do its bit” for what is, in effect, a national effort to shore up the currency as it creeps back down towards multi-decade lows.
“Some soft data would be required now for the BoJ to reverse course but, at this point, inflation is running warm enough to justify a hike,” said Abbas Keshvani, Asia macro strategist at RBC Capital Markets. “It is now difficult for the BoJ to stand pat. It’s all hands on deck in defence of the yen.” Leo Lewis
How bad is Germany’s inland shipping crisis?
With key parts of Germany’s chemicals and manufacturing sectors suffering from disruption to inland shipping due to low water levels in the Rhine, the all-important Ifo business climate index, due on Tuesday, could shed light on what effect the transport crisis is having on economic sentiment across the country.
Economists polled by Reuters expect the overall index to have risen for the fourth month in a row, to 87.2 points from 86.6 in July. Sub-indices on current conditions and expectations are also forecast to have improved.
If so, that will be in line with S&P Global’s Purchasing Managers’ Indices, which were released on Friday. The manufacturing PMI rose by 1.9 points to 54.1, its strongest reading in more than four years.
“The recovery in [German] industry is underpinned by strong growth in production and rising demand — both domestically and from export markets,” wrote Pantheon Macroeconomics in a note to clients.
Consumers, however, are sceptical about any uptick in their economic prospects. The GfK consumer sentiment index, to be released on Thursday, is expected to have risen marginally from minus 29.6 points to minus 29.5 points, still a strongly depressed level.
In addition, markets are also certain that the European Central Bank will deliver a second quarter-point rise in interest rates at its September 10 meeting.
“The weak labour market and pessimistic income expectations . . . are contributing to households’ continued low propensity to consume,” the Bundesbank warned in its latest economic outlook.
It said low water levels in the Rhine were “set to temporarily stifle the recovery of the German economy” in the third quarter of 2026. Olaf Storbeck
