By Bas van Geffen, CFA, Senior Macro Strategist at Rabobank
Except for Sweden, perhaps, no party walked away from the NATO meeting very satisfied. Ukraine has been lamenting the lack of a firm timeline for its accession bid, although the NATO allies did agree to start training Ukrainian pilots on the F16 fighter jet. However, Zelenskyy’s call for additional and better military equipment is also seemingly causing some annoyance. The UK defense secretary said “we’re not Amazon”, referring to the long shopping list, asking for some “gratitude”. Arguably, the problem isn’t so much Ukraine’s wishes as it is the steady depletion of military equipment in the West, as they provide their available material to the front.
I do wonder whether the defense secretary deliberately referred to the American shopping giant as it is running its annual Prime Day sale. Whereas NATO is yet to invite Ukraine for Prime membership, Amazon shoppers have been pushing up US online sales by 6% in the first 24 hours, according to Reuters.
The cost of living crisis may have encouraged more consumers to look for good deals. Yet, one Harvard Business School economist takes the more defeatist view, arguing that algorithmic pricing has actually made consumers less price sensitive. After all, if computers can adjust prices on the fly to match their competitors’, companies have less incentive to undercut each other and so there is less of a chance to find a good deal.
I’m not sure if that fully applies. Many other online platforms have followed with their own discounts, and so prices may actually be lower as manufacturers seek to reduce (post-Covid) overstock. However, this intertemporal shift in consumption –to two specific days of the year– is quite different from the market dynamic assumed in traditional microeconomics, i.e., one where consumers shop around to find the best price between sellers on any given day. MacKay makes the case that algorithmic pricing may therefore cause downside price rigidities, while adjusting more rapidly to inflation shocks. This causes inflation to hit faster, after which the higher prices can persist for longer.
Which brings us to the much-awaited US inflation data that were out yesterday. Prices rose less fast than expected in June, with headline CPI inflation of 3.0% y/y and core at 4.8%. This deceleration is tentatively positive news, although several caveats still apply. First of all, energy prices declined 16.7% y/y, while core commodities inflation was only 1.3%. The remainder of the inflation came from food (5.7%), shelter (7.8%) and services (excl. shelter, 3.2%). In other words, base effects in commodities prices are embellishing the deceleration of the CPI index. Our US strategist notes that these effects will likely work in the opposite direction, meaning that future inflation estimates could still break with this downward trend. All in all, he concludes, this does support Powell’s view that a more moderate pace of tightening is appropriate and that the Fed could also ‘skip’ the September meeting – after which we still expect the November hike not to materialize either due to sufficient slowdown in economic activity.
Evidence that the Fed may indeed be able to take a slower approach lifted markets yesterday. That outlook caused US Treasury yields to decline across the curve, but most notably around the 3-year maturity (-16bp). Equities turned green, with the S&P 500 closing 0.7% up, but the sharpest moves were in foreign exchange. The EUR/USD rose above 1.115, to post a one-year high.
That these moves were predominantly driven by the prospect of a less hawkish Fed was also clear from the European side: money markets continue to price two more hikes from the ECB, although their conviction has lessened a little bit over the past day. This decline in confidence may partly be spill-over from the US inflation data, and partly the result of a leaked draft statement ahead of today’s Eurogroup meeting. According to the draft, the Eurozone’s finance ministers will agree to withdraw energy support measures, and commit to gradual and realistic fiscal consolidation.
The removal of support for households and companies should be welcome news for the ECB. The central bank has long been calling for excessive support measures to be wound back, in order to help its fight against inflation. The outcome of the Eurogroup could therefore remove some upside risks from the ECB’s inflation projections. Yet, it is too early to say whether it would also actively lower their baseline: the draft statement does not appear to give specific timelines for the withdrawal of fiscal measures, so it remains to be seen how quickly governments will turn to aid the ECB in a coordinated bid to tighten the conditions for economic activity.
Moreover, while the finance ministers will acknowledge the need for fiscal consolidation, they added that this must be ‘realistic’, and they also note that reforms remain necessary. That leaves some loopholes for e.g. investment spending on measures that will improve the structural outlook for Europe, but also may add to inflationary pressures in the near term. On that note, Germany’s finance minister is planning a host of measures to boost competitiveness and climate-friendly investments, particularly targeting small and medium-sized enterprises. The government aims to achieve this through tax reductions and subsidies that could amount to €6 billion annually.
