Is US inflation still falling?

A further decline in US inflation is expected this week, which could bolster the case for multiple Federal Reserve interest rate cuts this year.

Economists are forecasting annual consumer price inflation of 3.1 per cent in June, when the latest figures are published by the Bureau of Labor Statistics on Thursday, according to economists polled by Reuters, down from 3.3 per cent in May.

Alongside Friday’s data showing that the pace of hiring in the US is slowing, the figures could encourage the Fed to deliver its first reduction in borrowing costs sooner rather than later. Markets at present expect two rate cuts this year, with the first arriving in September or November, but Fed officials suggested when they met in June that they expected to cut interest rates only once this year.

“June inflation outcomes along the lines of our forecasts should bolster the [Fed’s] confidence that the disinflation process is under way after a series of robust inflation readings in the first quarter,” wrote Barclays economists headed up by Pooja Sriram. “We think the tone of [Friday’s jobs data] will be important for the [Fed’s] assessment of whether the conditions needed to support a sustained return to the 2 per cent target are falling into place.”

However core inflation, which strips out the volatile food and energy sectors, is forecast to be unchanged. The measure, which is closely watched by rate-setters, fell to a three-year low of 3.4 per cent in May — helped by a change in methodology — but economists do not expect further progress in the upcoming data. Kate Duguid

Is China still flirting with deflation?

Investors will on Wednesday get the latest data on Chinese inflation, which unlike in developed economies has remained weak for more than a year.

Figures from China’s National Bureau of Statistics are expected to show that the consumer price index rose 0.3 per cent year on year in June, the same level as in May. Producer prices, which are heavily affected by commodity prices, are expected to have fallen 1 per cent.

China’s consumer price inflation has dipped into negative territory repeatedly over the past year, as a result of a challenging economic backdrop including a real estate slowdown.

The persistently low levels of inflation, which reached minus 0.8 per cent in January, have raised concerns among analysts and investors over the strength of consumer demand in the world’s second-largest economy.

Beijing will this month hold a five-yearly so-called Third Plenum, a major event for top policymakers to set the country’s economic direction. They are likely to focus on the real estate sector, which has struggled since a wave of developer defaults in late 2021 and where new home prices are falling.

Analysts at Citi pointed to price levels as part of the economic backdrop that may shape policymakers’ thinking. “Soft domestic demand could continue to weigh on inflation and start to erode production strength,” they wrote last week.

They anticipate a 0.3 per cent increase in CPI, noting that “reflationary momentum could retreat in June”. Pork prices, which have a big impact on the basket of consumer goods used in China, surged month on month in June but “they may not be enough to offset weakness of other food prices”.

“Online promotion events in June could also send goods prices lower,” Citi added. Thomas Hale

Will UK markets keep rising for Labour’s first weeks in government?

The pound and domestically focused UK stocks gained on Friday, with an index of mid-cap equities hitting its highest level since 2022, as a landslide Labour election victory prompted investors to speculate that markets may have further to run.

The moves built on modest gains for UK assets ahead of the election, with sterling the only one of the G10 grouping of major currencies to have appreciated against the dollar this year, buoyed by new Prime Minister Sir Keir Starmer’s focus on delivering financial stability and reforming planning rules.

“The UK can look forward to a period of greater political stability that could attract foreign capital back to the country,” said Chris Forgan, portfolio manager at Fidelity International. “The economy is recovering from a slowdown in 2023 and the outlook is improving.”

Analysts said a brightening outlook for mergers and acquisitions in the UK as well as expectations that the new government will be able to forge better relationships with the EU have also helped fuel optimism in UK markets, despite the tight fiscal constraints that Starmer has inherited.

Unlike with mid-cap stocks, sterling strength can be a headwind for the FTSE 100 index, due to its constituents’ overseas earnings.

Nevertheless, after a dismal period for UK stock performance in recent years relative to US and European markets, Dirk Steffen, chief investment officer for Emea at Deutsche Bank, said policy stability and cyclical growth “will make UK assets worth another look”. Mary McDougall