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Market Update

Inflation hits 40-year high while euro reaches parity with U.S. dollar

Date:
July 18, 2022

Summary

Inflation increased by 9.1% year-over-year in June, marking the highest rate of inflation since November 1981. June retail sales beat expectations but consumer sentiment is still historically low. For the first time since 2002, the euro reached parity with the U.S. dollar.

Inflation hits 40-year high

The Bureau of Labor Statistics (BLS) reported that June’s consumer price index (CPI) grew 9.1% from a year ago, marking the highest rate of inflation since November 1981. The inflation mark, which came in above the 8.8% Dow Jones estimate, was driven by a 7.5% monthly increase in energy prices. Within energy, gasoline prices increased by 11.2% monthly and have jumped 59.9% over the last twelve months. On a monthly basis, CPI increased by 1.3% compared to the 1.1% estimate. Core CPI, which excludes historically volatile food and energy prices, rose by 5.9% on a yearly basis and 0.7% on a monthly basis. Both figures trumped estimates of 5.7% and 0.5%, respectively. U.S. Treasury Secretary Janet Yellen called the inflation figure “unacceptably high” and said it should be the administration’s “top priority” to bring it down. Prior to the inflation reading, the market expected a 75 bp rate hike. After the meeting, markets had quickly priced in a 100 bp hike though just as quickly backed down and are now expecting a 75 bp hike with a possibility of a 100 bp hike.

Source: Bloomberg

Retail sales exceed expectations, consumer sentiment still low

Retail sales rose 1.0% in June, exceeding expectations of a 0.9% increase. Although retail sales saw an increase, the figure is not adjusted for June's 1.3% monthly increase in inflation, implying that real sales decreased slightly during the month. Gasoline sales led the way in increases, rising by 3.6%. Other notable increases included furniture and home furniture stores (1.4%) and motor vehicles and parts dealers (0.8%). July’s consumer sentiment index painted a gloomier picture of the economy, as the index came in at 51.1, slightly better than the 50.0 estimate, but still historically low.

Small business expectations continue to drop

The NFIB Small Business Optimism Index fell by 3.6 points in June to 89.5, the lowest figure since 2013. This marks the sixth consecutive month that small business owners’ optimism has been below the survey’s average of 98. Small business owners expecting better business conditions over the next six months also hit the lowest point in the survey’s 48-year history. Inflation continues to weigh on small businesses, as 34% of owners reported it was the most important problem they currently face, the highest figure since 1980.

Euro reaches parity with U.S. dollar

For the first time since 2002, €1 equaled $1. As investors continue to turn to the dollar as a safe haven in uncertain times, the euro has dropped over 11% since the start of the year. The European Central Bank announced two weeks ago that it intends to raise interest rates for the first time in a decade at the July ECB meeting, but that news only temporarily stopped the euro’s slide.

The dollar continues to strengthen elsewhere. Last week, the USD-JPY rate hit 139.39, its highest level since 1998. The U.S. dollar index (DXY) also hit its highest level since 2002. Due to the strength of the dollar, many companies have opportunities to reduce interest expense via cross-currency swaps.

(Related insight: “7 ways to maximize FX and commodity hedging impact while minimizing costs”)

The week ahead

After a jam-packed week of economic data and happenings, this week projects to be a bit slower. The ECB meets on Thursday, while the NAHB Home Builders’ Index and Existing Home Sales headline U.S. economic data releases.

(Related insight: watch the on-demand webinar, "Semiannual Market Update for Corporates")

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Disclaimers

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