Introduction

Just when the European Central Bank has cut at least one of its rates and just ahead of what is expected to be a second straight policy cut by the Federal Reserve, consumer prices are beginning to show visible pressure, in no less economies than the US and China. And a rate cut by the Fed would not only follow a rare string of increases in core consumer prices which we'll look at in this article, but also follow a run higher in average hourly earnings which in previously released data posted three straight 0.3 percent monthly gains topped by 0.4 percent in August. Yes, central banks need to cut rates to keep their currencies down and their nation's exports up in a world of trade friction, but whatever happened to being "informed by incoming data"? The risk of an emerging inflationary edge could prompt some central bankers to scale back their rate-cut ambitions and for the markets to scale back their rate-cut expectations. And rate cuts are where we'll start, one from the ECB.

Monetary policy

The ECB had been widely expected to ease again but, while certainly wide-ranging and providing some additional monetary stimulus, the risk is that the new package may have only a limited economic impact. In line with the consensus, there was no change in the benchmark refi rate which stays at 0.00 percent. However, the deposit rate, which has become all the more important as levels of excess liquidity have risen, was lowered by 10 basis points to a new record low of minus 0.50 percent. The cut here was much as anticipated but, if anything, at the smaller end of expectations. At the same time, the central bank announced a two-tier system for reserve remuneration in which part of banks' holdings of excess liquidity will be exempt from the negative deposit rate. This move is aimed at limiting the negative impact of the rate cut on bank profitability.

Hand in hand with this, forward guidance was modified significantly. The Governing Council now expects key interest rates to remain at their present or lower levels until it has seen the inflation outlook "robustly converge" to a level close to but below 2 percent. This open-ended and data-dependent rule should cement expectations that any tightening is likely to be in the distant future. Also as anticipated, the ECB decided to reopen its asset purchase programme (APP). This was terminated at the end of last year when the central bank was convinced that policy had been loosened sufficiently to achieve its inflation goals. New net asset purchases will run at a relatively modest €20 billion a month from November 1 for as long as necessary. Monthly purchases will be just €5 billion more than the final tranche in the last quarter of 2018, but the lack of a cut-off date is a plus for the bond market.

In sum, the ECB's suite of measures looks quite impressive. However, while definitely a step in the direction of stimulus, it is still limited. The cut in the deposit rate may be too small to provide much boost to the domestic economy or weaken the pound significantly. Moreover, irrespective of the new tiered deposit rate, the cut in the deposit rate may add to growing concerns about the negative effects of sub-zero rates on bank margins as well as on savings and the efficient working of financial markets. Similarly, having already reached the €2.6 trillion mark, the resumption of the QE programme is likely to have only a limited impact as, open-ended or not, it suffers from diminishing returns. And as for forward guidance, there is only so much that it can hope to achieve.

Inflation

More is what central banks just about everywhere are looking for when it comes to inflation and solid hints of such improvement may already be coming out of the US. Core inflation rose a higher-than-expected 0.3 percent in August for the third straight 0.3 percent reading and the hottest streak of the expansion. The core's year-on-year rate of 2.4 percent rose 1 tenth and was also higher than expected and also an expansion high. These results favor the hawks on the FOMC and may well lower what chances there are for an upsized 50-basis-point cut or a unanimous vote for a 25-basis-point cut. The core rate is dominated by housing and medical costs, the former rising only 0.1 percent in the month but the latter up 0.7 percent that follows a run of sharp monthly gains including 0.5 percent in July. Hospital services jumped 1.4 percent in August following July's 0.5 percent gain with medical commodities also higher, both offsetting flat showings for physician services. Year-on-year, medical care was up 3.5 percent in August with housing up 2.8 percent. Recreation also showed pressure, up 0.5 percent on the month with prices for household furnishings, airfares and used vehicles also showing August pressure. Overall, the CPI rose an as-expected 0.1 percent on the month and an as-expected 1.7 percent on the year. Energy prices fell a monthly 1.9 percent in August while food prices were unchanged, both of which are excluded from the core.

Turning back to the core, prices for housing were held down by a 2.1 percent decline for away-from-home lodging. Both rent and owners' equivalent rent posted moderate 0.2 percent gains. Though mostly centered in medical costs, the overall 0.3 percent rise for core prices — again the third in a row — is less than moderate and does suggest that Fed policy makers could afford to limit their stimulus efforts toward their 2 percent overall inflation goal. As far as tariff effects go, there were no smoking guns in the latest report but the general trend higher for the core will raise talk that higher costs for Chinese imports may nevertheless be filtering through to the US consumer.

And consumer inflation may also be heating up in China but here the cause isn't medical care but food prices, a factor that may be part of the backdrop in ongoing trade negotiations and specifically reports that China is once again buying US food products. China's headline consumer price index advanced an unexpectedly sharp 2.8 percent on the year in August, unchanged from July and at its highest level since February 2018. Food prices rose 10.0 percent on the year in August, picking up further from July's 9.1 percent. Food price inflation has increased for the last five months in a row and is now at its highest level since 2011, largely reflecting the impact of ongoing disruptions to pork supply. Yet in contrast, year-on-year growth in non-food prices moderated from 1.3 percent to 1.1 percent, with little change in most categories.

Like core inflation in the US, wage pressure in the US may also be moving higher based on four straight elevated readings for average hourly earnings, the last posted earlier this month with the August employment report. For the UK, wages proved surprisingly strong in the July/August labour market report. Annual average earnings growth in the three months ended July climbed three tenths to 4.0 percent, matching the highest mark since the three months way back in May 2008. However, excluding bonuses the picture was a little softer with the rate easing from 3.9 percent to 3.8 percent. Regarding job counts, the labour market appears surprisingly robust and is supporting wage growth at a high enough rate that may well trouble hawks at the Bank of England. The report's ILO data showed the number of people out of work falling 10,000 in the three months to July and saw this measure of the jobless rate dip from 3.9 percent to 3.8 percent, the lowest result since 1974.

Whether consumer prices or wages are edging higher, producer prices across the developed economies do not appear to be the cause. Producer prices in Japan missed already subdued expectations, down a year-on-year 0.9 percent in August and weakening further from a decline of 0.6 percent in July. On the month, the index fell 0.3 percent after no change in July. The fall in August was broad-based across most major categories. Petroleum and coal prices declined 9.9 percent on the year in August after falling 8.5 percent in July, while food and beverage prices slowed from an increase of 0.9 percent to 0.8 percent. Price changes were also weaker for utilities and chemicals but steady for transportation equipment. Weak producer price inflation in August is broadly in line with PMI survey data that indicate input costs in the manufacturing sector rose at the slowest pace since December 2016. August consumer price data out of Japan are scheduled for release in the coming week.

Machinery orders

Traction for consumer prices and wages may well reflect general strength in global consumer spending and employment, while softness in producer prices may well be the result of weakness in global manufacturing. Core machinery orders in Japan (private excluding volatile items) fell 6.6 percent on the month in July after increasing 13.9 percent in May. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures which is a key point of interest for policy makers right now amid concern that business sentiment is weakening and with it business investment. The fall in July orders was mainly driven by non-manufacturing where growth weakened particularly sharply in electricity supply, transportation and postal activities, and also real estate. Yet manufacturing orders, in an important contrast, rebounded solidly with an increase of 5.4 percent on the month to more than reverse June's 1.7 percent decline. And when looking at actual yen levels and not percentage change, as tracked in the accompanying graph, core orders have actually been holding up very well, at ¥897 billion in July which together with June's ¥960 billion are the two best months of the last year and the second best two months of the last 10 years. Based on Japanese machinery orders if nothing else, there's no guarantee that producer prices won't begin showing at least a little pressure.

International trade

Japan in Asia, much like France in Europe, is holding up well unlike China where contraction in cross-border trade appears to be taking an increasing toll. China's overall trade surplus in US dollar terms narrowed to $34.83 billion in August from $45.06 billion in July. Exports fell 1.0 percent on the year in August after advancing 3.3 percent in July, while imports fell 5.6 percent for a second month in a row. The fall in headline exports growth was largely driven by weaker demand from the United States as US-China trade tensions escalated further and new tariff rates took effect. Exports to the US, the red line in the graph, fell 16.0 percent on the year in August after dropping 6.5 percent in July. Imports from the US also weakened further in August, down 22.4 percent on the year after falling 19.1 percent previously. Both of these readings have been in deep contraction most of the year with no sign of relief, which of course may be another factor behind China's interest in reviving trade talks with the US. Demand from the European Union also slowed in August, with year-on-year growth in exports falling from 6.5 percent to 3.2 percent. Exports to Japan rose 1.5 percent on the year, rebounding from July's 4.1 percent decline.

The US and China are not the only trouble spots for trade and may not prove, given the risk of a no-deal Brexit, to be even the most troubled spots. UK trade showed a giant influx of imports heading into this year's March 31 deadline for a deal, a date of course that has been extended and that may again result in lopsided results for UK data before the new October 31 date. For July, year-on-year imports showed improvement, down 1.7 percent versus June's deep 3.7 percent contraction with growth in exports at 4.5 percent. The total goods deficit came in at £9.14 billion in July following £8.92 billion in June. Though deeper than expected, this is well short of the double-digit shortfalls seen in every month since February last year. Regionally, the bilateral red ink with the EU was broadly flat at £7.21 billion and marginally larger with the rest of the world at £1.93 billion. Recent trade data have been unexpectedly good and, indeed, total net exports boosted second quarter GDP growth by a sizable 3.5 percentage points. Yet improvement has been tied to the steep contraction in imports following the pre-March 31 surge. Whether a second import surge begins ahead of Halloween will be something to track on the economic calendar.

Industrial production

The possibility of recession in continental Europe or at least some nations within Europe is another story, especially given recent alarms sounding in Germany. Italy of course has been skirting the recession line since late last year and the latest indications out of the nation's industrial sector are not favorable. Industrial production (ex-construction) contracted again in July. An unexpectedly steep 0.7 percent monthly fall in July followed a 0.3 percent drop in June and means that output now equals its lowest level since last December. Annual growth was also in the negative column at minus 0.7 percent, up from minus 1.2 percent but only courtesy of favorable base effects. The latest monthly slide was largely attributable to capital goods which fell a sharp 1.6 percent. Yet consumer goods were also down, off 0.3 percent and intermediates 0.2 percent. The headline decrease would have been more marked but for a 1.3 percent bounce in energy. Overall goods production has now decreased in four of the last five months. Output in July was 0.5 percent below its average level in the second quarter when it fell 0.7 percent versus January-March. August and September will need to see a decent recovery or Italy's industrial sector will be back in technical recession.

Let's turn back to the UK and check this nation's industrial sector which, like Italy, has been struggling to say the least. Monthly readings have been flat, up 0.1 percent in July and down 0.1 percent in June, but year-on-year rates, as tracked in the graph, have been clearly weak. Annual growth slid from minus 0.6 percent in June to minus 0.9 percent in July. Yet monthly details in July do show promise with manufacturing faring a little better with a 0.3 percent gain led by pharmaceutical products and including useful gains too for computer, electronic & optical products, metal products and textiles & leather. The main downside pressure came from chemical products and transport equipment, both down sharply on the month. Outside of manufacturing, total industrial production was held in check by mining & quarrying and electricity & gas, both of which posted declines, but boosted by a gain for water supply. Despite the moderately positive monthly readings, growth of total industrial production in the latest three months was still negative at minus 0.5 percent, albeit up from minus 1.4 percent in the second quarter. On the same basis, manufacturing was down 1.1 percent after a 2.3 percent contraction. So, the sector is still in the doldrums and the previously released August manufacturing PMI for the UK, down 1 point at a sub-50 score of 47.0, holds out little hope of any real improvement in mid-quarter.

Government spending

With rates at key central banks at or below zero and with rates at other central banks heading that way, the need for fiscal stimulus to come to the rescue is a popular topic especially in Europe. But the picture in the US is reversed: the Fed's policy rate at 2.125 percent still has plenty of room to move lower and stimulate demand while, however, the US government's deficit may have little scope at all to move deeper into the red. The Treasury budget deficit came in larger than expected in August, at $200.3 billion to deepen the total deficit for the first eleven months of the 2019 fiscal year to $1.067 trillion, 18.8 percent more than in the same period of fiscal 2018. The receipts side of the ledger is positive, at $3.088 trillion with one month to go in fiscal 2019 and up 3.4 percent from the same period last year. Individual income taxes brought in $1.535 trillion, 0.9 percent more than in the same period for fiscal 2018, while receipts from corporate taxes were $170.0 billion, 4.5 percent more than last year. Employment and retirement social insurance receipts were also up as were excise taxes. And partly reflecting the impact of tariffs imposed on Chinese goods, receipts from customs duties rose 74.1 percent to $64.0 billion. But now the other side of the ledger. Outlays for the first eleven months of the current fiscal year totaled $4.155 trillion, 7.0 percent more than in the same period last year. Spending on defense during the period totaled $601.1 billion, up 9.0 percent from the same period last year, while outlays for health & human services rose 8.4 percent to $1.138 trillion and for social security by 3.3 percent to $1.013 trillion. Interest expense, reflecting the rising cost to finance the government's expanding deficit, was up 9.0 percent to $537.0 billion.

Markets: The race to negative rates and relative US value

Two central banks where policy rates have long been under zero — Bank of Japan and the Swiss National Bank — are meeting in the coming week and though deeper underwater exploration isn't expected by either, anything of course is possible especially for these two banks where unwanted currency strength is front and center and openly discussed (unlike the Fed) in their policy debate. Central banks focus their policy efforts (quantitative easing and bond buying aside) on short-term rates which nevertheless do pull long rates in tow. But how negative can long rates go before buyers simply vanish? The yield for Japanese 10-year bonds is roughly minus 0.15 percent, German 10-year bunds are at minus 0.45 percent, and the Swiss 10-year is about minus 0.65 percent. For investors, the US 10-year yielding plus 1.90 percent looks incredibly rich by comparison and looks to stay that way even as the Fed takes its overnight rate, still at a strikingly positive 2.125 percent, slowly lower in what may prove incremental 25-basis-point steps. And US Treasuries aside, increasingly negative policy rates are likely to make investors consider turning more toward non-sovereign instruments, whether corporate bonds or equities or commodities.

The bottom line

Consumer inflation, at least at the core level in the US, may well be getting a lift from and may well be converging with the early indications of wage pressure in the US employment report. Were there no trade wars and no global trade contraction and no special risks to sovereign manufacturing bases, global central bank policy right now would very likely be more neutral than stimulative. And though interest rates are historically the most significant tool for managing economic policy at a national level, should the onus be completely on central banks to stimulate growth? For the Fed the answer may well be yes given how deep in the red the US government is getting itself.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of September 16 to September 20

Central banks will dominate a heavy week for the economic calendar, primarily the Federal Reserve which on Wednesday is expected to cut rates for a second straight meeting but only by an incremental 25 basis points. Key will be how Fed Chair Jerome Powell describes the possible rate cut, as an extension of an established stimulus effort or only a "mid-cycle policy adjustment" as he did at the Fed's last meeting in July. The Swiss National Bank may also cut rates at its meeting on Thursday though no action is expected from either the Bank of Japan on Wednesday or the Bank of England on Thursday. Economic data will unroll first thing Monday with an August round of key Chinese data led by industrial production and also including fixed asset investment and retail sales with improvement largely the expectation overall. Manufacturing sales will be posted out of Canada on Tuesday as will industrial production out of the US where only marginal improvement from July contraction is expected for August. Consumer inflation reports out of the UK and Canada will be posted on Wednesday and increasing price pressures are not expected. Sentiment reports will be posted on Tuesday with Germany's ZEW report on business expectations and on Friday with the Eurozone's consumer confidence report. Retail sales will round out the week on Friday, from the UK and Canada where forecasters see mixed results.

Chinese Fixed Asset Investment for August ( Sun 22:00 EDT;  Mon 02:00 GMT;  Mon 10:00 CST)

Consensus Forecast, Year-to-date: 5.6%

Helped by industrial investment, fixed asset investment rose 5.7 percent year-to-date in July which matched expectations. Forecasters see August fixed asset investment rising a year-to-date  5.6 percent.

Chinese Industrial Production for August (Sun 22:00 EDT; Mon 02:00 GMT; Mon 10:00 CST)

Consensus Forecast, Year-on-Year: 5.3%

Slowing was broad based and much sharper than expected in July, at a year-on-year 4.8 percent and a seven-year low. Forecasters see August industrial production reviving to a 5.3 year-on-year pace.

Chinese Retail Sales for August (Sun 22:00 EDT; Mon 02:00 GMT; Mon 10:00 CST)

Consensus Forecast, Year-on-Year: 8.1%

Broad-based weakness especially for autos drove unexpectedly sharp slowing in July retail sales, down 2.2 percentage points to a year-on-year 7.6 percent. For August, forecasters expect retail sales to rebound to an 8.1 percent.

Germany: ZEW Survey for September (Tue 05:00 EDT; Tue 09:00 GMT; Tue 11:00 CEST)

Consensus Forecast, Business Expectations:  -38.0

Business expectations grew sharply more pessimistic in August, down nearly 20 points to minus 44.1 with only limited bounce back expected in September, at a consensus minus 38.0.

Canadian Manufacturing Sales for July (Tue 08:30 EDT; Tue 12:30 GMT)

Consensus Forecast, Month-to-Month: -0.5%

Canadian manufacturing sales swung lower in June but not as much as expected, falling 1.2 percent after a strong 1.6 percent rise in May. But new orders in June were especially soft, down 4.2 percent with unfilled orders down 1.2 percent. For July the headline sales consensus is a monthly decrease of 0.5 percent.

US Industrial Production for August (Tue 09:15 EDT; Tue 13:15 GMT)

Consensus Forecast, Month-to-Month: 0.1%

Consensus Range: -0.5% to 0.6%        

Manufacturing Production

Consensus Forecast, Month-to-Month: 0.1%

Consensus Range: -1.0% to 0.3%

Capacity Utilization Rate

Consensus Forecast: 77.5%

Consensus Range: 77.3% to 77.7%

Manufacturing production fell sharply in July and, together with a decline in mining, pulled headline industrial production down by 0.2 percent in the month. August is seen at a headline increase of only 0.1 percent with manufacturing also seen up only 0.1 percent. Capacity utilization fell sharply in July to 77.5 percent which is the call for August.

Bank of Japan Announcement for September (Any time Wednesday local time)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Level: -0.10%

No change is expected for the Bank of Japan's announcement with the short-term policy rate for excess reserves remaining at minus 0.10 percent and the target level for the long-term 10-year yield at around zero percent. At its last announcement in July, the BoJ said it would ease policy "without hesitation" to stimulate demand and inflation.

UK CPI for August (Wed 04:30 EDT; Wed 08:30 GMT; Wed 09:30 BST)

Consensus Forecast, Year-on-Year: 1.8%

The CPI has been hovering at the Bank of England's 2 percent target though expectations for August look for a dip under, to 1.8 percent from July's 2.1 percent.

Canadian CPI for August (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast, Month-to-Month: -0.2%

Consensus Forecast, Year-on-Year: 2.0.%

Headline consumer prices were unexpectedly strong in July, up 0.5 percent for a year-on-year 2.0 percent that was right on the Bank of Canada's target. Goods prices rose in July despite slowing for gasoline. For August, the consensus calls for monthly give back with a 0.2 percent decrease but with the yearly rate holding unchanged at the 2.0 percent mark.

Federal Funds Target for September (Wed 14:00 EDT; Wed 18:00 GMT)

Consensus Forecast, Change: -0.25 basis points

Consensus Forecast, Midpoint: 1.875%

A 25-basis-point rate cut is the call for the September policy meeting after the FOMC cut rates in July for the first time by an incremental 25 basis points citing global slowing and trade tensions and the associated risks to domestic manufacturing. Quarterly forecasts will be posted with this report and are expected to support expectations for at least one more rate cut this year. A highlight of the press conference will likely be whether or not Chair Jerome Powell describes the possible rate cut as an extension of a long-term easing policy or, as he did in July, as only a one-time "mid-cycle policy adjustment".

Swiss National Bank Monetary Policy Assessment for Sept (Thu 03:30 EDT; Thu 7:30 GMT; Thu 09:30 CEST)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Level: -0.75%

The Swiss National Bank, despite the ECB's stimulus move, is expected to keep its key deposit rate at minus 0.75 percent though some do see a 25-basis-point cut to minus 1.00 percent. At its last meeting in June, the bank retained its assessment that the Swiss franc is still "highly valued" and reiterated its willingness to intervene as and when necessary to prevent any unwanted appreciation.

Bank of England Announcement for September (Thu 07:00 EDT; Thu 11:00 GMT; Thu 12:00 BST)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Level: 0.75%

Consensus Forecast: Asset Purchase Level: £435 billion

No change is once again the expectation for Bank of England monetary policy which, despite a standing bias toward tightening, is locked in place by not only the Brexit dilemma but also by general slowing in the global economy. Bank Rate is expected to stay at 0.75 percent and the QE ceiling at £435 billion.

Japanese Consumer Price Index for August (Thu 19:30 EDT; Thu 23:30 GMT; Fri 08:30 JST)

Consensus Forecast, Ex-Food Year-on-Year: 0.5%

Very light pressure is the consensus for ex-food consumer prices, at a year-on-year 0.5 percent pace in August following a 0.6 percent pace the previous two months and well below the Bank of Japan's 2 percent target.

UK Retail Sales for August (Fri 04:30 EDT; Fri 08:30 GMT; Fri 09:30 BST)

Consensus Forecast, Month-to-Month: -0.2%

After a modest and as-expected 0.2 percent rise in July, retail sales are expected to decrease 0.2 percent in August. Annual sales growth in July was 3.3 percent, down from 3.8 percent in June.

Canadian Retail Sales for July (Fri 08:30 EDT;  Fri 12:30 GMT)

Consensus Forecast, Month-to-Month: 0.5%

Canadian retail sales in July are expected to increase 0.5 percent versus no change in June, a month held back by a drop in vehicle sales and a mostly price-related decline at gasoline stations that offset increases for food as well as apparel and sporting goods.

Eurozone: EC Consumer Confidence Flash for September (Fri 10:00 EDT; Fri 14:00 GMT; Fri 16:00 CEST)

Consensus Forecast: -7.0

Confidence has been soft, at minus 7.1 in August versus minus 6.6 in July. Forecasters see the European Commission's consumer confidence flash coming in at no better than minus 7.0 for September.