Inflated Expectations

The Fed's preferred inflation measure didn't add any urgency to the rate hike debate on Tuesday but it helped to crystalize the debate. The dollar finished the day as the top performer on continued momentum from Jackson Hole while the pound lagged. Key data on Australian housing and Japanese consumers is due next. Friday's UK jobs report will be the week's main event, but Wednesday's Eurozone flash Aug CPI should be a key determinant of medium term EURUSD moves. Gold will be the focus of this week's Premium video ahead of NFP.   

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The PCE report showed that US inflation rose 0.8% year-over-year in July. That low number matched expectations and underscored the needlessness of hiking rates in September.

The low inflation number isn't an artifact of slow commodity inflation a year ago either. In month-over-month terms, inflation was flat and has average just a 0.1% m/m rise over the past three and six-month periods.

Core inflation is a touch hotter at 1.6% y/y but slowed from 1.7% and aside from fanciful hopes that a 'tight' labor market will lead to wage gains, there isn't any evidence of a brewing jump in prices.

The bond market may be signalling some apprehension about the hawkish rate talk. On Monday, yields moved lower across the curve including 7 bps lower in 10s. Stock markets also showed some diminished fears with the S&P 500 wiping out the Thurs/Friday decline.

The dollar was a different story as the momentum higher continued, albeit at a slower pace.  Late in the day, USD began to take the hint from bonds and pared some of the gains. With a trio of Fed doves coming up on Wednesday in Evans, Rosengren and Kocherlakota, the retracement theme might continue.

On the data front, housing in Australia and Japan are in focus. There are some preliminary signs of a slowdown in Australian home construction; dwelling approvals fell 2.9% in June after a 5.4% decline in May. The outlook isn't any better for the July data at 0130 GMT.

The main focus is on Japan as BOJ speculation mounts. It would take an extraordinary turn in the numbers to derail Kuroda's plan of action but a series of weak data points could add some pressure. At 2330 GMT numbers are due out on jobs, household spending and retail sales.