GS MORNING: 1 US CPI Recap, 2 FX Trader Call Takeaways, 3 Asia FX Update and 4 GS Space Webcast Today

GS MORNING: 1) US CPI Recap, 2) FX Trader Call Takeaways, 3) Asia FX Update and 4) GS Space Webcast Today

Highlights from GS Research, Sales, and Trading: 1) US CPI Recap, 2) FX Trader Call Takeaways, 3) Asia FX Update and 4) GS Space Webcast Today

1) US ECONOMICS (MERICLE) – CPI Recap & PCE Estimate – LINK & LINK

CPI: Core CPI increased by 0.22% in July, roughly in line with expectations. On the firmer side, the OER and rent categories rebounded to 0.26%, somewhat above our estimate of their underlying trends. Prices of medical services were also firm, boosting the core by 5bp. The communication categories increased more than expected, likely reflecting recently announced price hikes on consumer electronics, but software and accessories prices, which have a much larger weight in core PCE than core CPI, were softer than in previous months. On the softer side, hotel prices declined sharply, reflecting the continued reversal of the boost from the World Cup and weighing on the core by 5bp.

PCE: We expect a 0.23% increase in core PCE prices in July, a touch above core CPI at 0.22% and a bit above where unrounded consensus expectations appear to be. A key reason is that we expect an 8bp contribution from a 4% increase in portfolio management services, reflecting increases in equity prices. While equity prices fell a bit in the prior month of June—the key period for July PCE—they rose strongly in Q2 overall. Some asset managers that contribute source data for the PPI series that the PCE index borrows report their revenues quarterly, meaning that both prior-month and prior-quarter equity returns matter in the first month of the quarter. See here for a detailed summary of the methodological changes to the measurement of portfolio management inflation.

FOMC: We think most voting members of the FOMC would see the July inflation numbers we expect as acceptable and would want to see the August CPI and PPI before deciding whether to hike at the September meeting. We forecast that core CPI and PCE inflation will print around 0.2% in August and that the methodological changes to portfolio management, software & accessories, and legal services will lower the year-over-year rate of core PCE inflation by 0.2pp next month. We expect this to keep the Fed on hold in September and ultimately through the end of the year.

Source: Goldman Sachs Global Investment Research, Department of Labor

CHART 2: Impact of Equity Returns on Portfolio Management Inflation Will Only Appear 2-4 Months Later

Source: Goldman Sachs Global Investment Research