Inflation eases as retail sales strengthen

The latest U.S. inflation and retail sales figures painted an encouraging picture of the state of the economy, and increased the likelihood the Federal Reserve will push ahead with a rate cut at its September policy meeting. Producer Price Index inflation (often called factory gate inflation) slowed from 2.7% in June to 2.2% in July, and Consumer Price Index inflation eased from 3.0% in June to 2.9% in July. For both measures, core inflation (which excludes volatile prices like fuel) slowed. Meanwhile, retail sales grew by 1% m-o-m in July, up from -0.2% in June, beating Wall Street’s forecast of 0.3% by some margin. Also, figures from NFIB showed optimism among small business owners increased in July.

The global oil market might in Q4 of this year see supply exceed demand if current plans for OPEC+ to increase output go ahead, according to the International Energy Agency. OPEC+ consists of the twelve OPEC countries, plus eleven associated nations including Russia and Mexico.  At present, a busy U.S. summer driving season is causing demand to outpace supply, which is supporting the oil price. However, OPEC+ plan to up production by over 500,000 barrels per day from October. This could reduce energy prices globally for both households and firms, thus easing inflationary pressures and strengthening the case for lower interest rates. This will be good news for real estate, although industrial and logistics could benefit the most, as fuel is a big operating cost for many tenants in those sectors.

This week sees the release of the early ‘flash’ estimate of the PMI index. This is based on a survey of businesses on trading conditions, where the responses are compiled into a score whose convention is a reading of over 50 indicates growing output. Given recent signs of robust growth in the economy, we are predicting a reading well above 50 for July. Also, Federal Reserve officials will hold their annual conference at Jackson Hole in Wyoming, and the financial markets will be monitoring the speeches for clues on the outlook for interest rates.

Things to watch for this week

Thursday, August 22

‘Flash’ U.S. Composite PMI Index, August

Previous: 54.3
Forecast: 53.8

This business activity index has seen strong readings for several months now. We are forecasting a small deceleration, given interest rates remain high, but to a level that is still well above the pivotal 50 mark.

Friday, August 23

New Home Sales, July

Previous: 617k
Forecast: 617k  

With interest rates still high and a cut expected next month, we are expecting new home sales in July to be broadly similar to June.