Assessing Rate Hike Expectations: Resilient US Economy and UK Wage Inflation Data

US: July rate hikes look certain

The resilience of the US economy has seen market interest rate expectations push higher with the yield on the 10Y Treasury bond breaking above 4%. A July rate hike looks certain, with the market sensing a strong chance that we get another hike, as suggested by the Federal Reserve, before year-end.

The upcoming data flow centres on inflation and here we expect to see some good news, with lower energy costs, softening food prices, a topping out in housing rents and falling vehicle prices set to partially offset strength in the core services ex-housing component that the Fed is so fearful of. A 0.3% month-on-month reading for headline and core inflation would see the annual rate of headline inflation slowing to 3.1% from 4% and core (ex-food and energy slowing to 5% from 5.3%). While this will do little to alter the likelihood of a July hike, it could at the margin provide a little relief and see longer-dated interest rate expectations tick a little lower.

Pipeline price pressures are set to offer more encouragement that inflation can continue slowing, with the PPI report set to show annual increases in producer prices slowing to just 0.4%YoY with the core PPI rate slowing to 2.5%. We will also be closely following the National Federation of Independent Businesses’ pricing intentions survey. A further decline in company appetite to hike prices would offer encouragement that we will also start to see more of an easing in service sector inflation.