A lower-than-expected US PPI inflation depreciated the DXY Index by 0.5% to 102.62, near the 102.69 close on August 5. PPI inflation increased by 0.1% MoM in July vs. the consensus for it to stay unchanged at June’s 0.2%. Excluding food and energy prices, core PPI inflation was flat at 0% MoM in July, less than the 0.2% consensus, while June was revised to 0.3% from 0.4%. The US Treasury 2Y yield fell a second session by 8.8 bps to 3.93%, while the 10Y yield declined less by 6.1 bps to 3.84%. The futures market priced in a 159% chance of the Fed lowering interest rates by 50 bps to 4.75-5.00% at its FOMC meeting on September 18.
Today, the consensus for US CPI and core inflation to increase by 0.2% MoM in July is reasonable. Since 2015, in the 11 months that headline inflation posted negative monthly readings, only 3 occasions exceeded 0.2% increases in the next month. Core inflation had 0.1% MoM readings in 24 months since 2015, of which 20 months increased by 0.2% or less in the following month. Apart from one rare occasion of 0.6%, the other upside surprises were limited to 0.3%. Today’s CPI data should help set the tone for the Fed’s Jackson Hole Symposium on August 22-24.
Atlanta Fed President Raphael Bostic favoured waiting for “a little more data” before supporting a rate cut by the end of this year. Bostic’s position shifted notably from the first half of the year when he expected no rate cut in 2024, fearing that a premature cut could undermine the progress made in combating inflation. At a moderated conversation at the Conference of African American Financial Professionals, Bostic noted that the breadth of inflation has improved, especially the significant retreat in housing inflation in recent months. Bostic echoed his colleagues’ concerns regarding the recent increases in the unemployment rate and the Fed prioritizing full employment over price stability in its dual mandate. Hence, expect fewer or no Fed officials to forecast no rate cuts this year in September’s Summary of Economic Projections.
With most of this year’s yen carry trades unwound, it has become easier for markets to turn bearish on the greenback on Fed cut expectations.
Quote of the day
”I know I am getting better at golf because I am hitting fewer spectators.”
Gerald R. Ford
14 August in history
In 1974, US President Gerald Ford signed an act of Congress permitting US citizens to own and deal in hold, three years after the Nixon administration ended the USD’s link to gold.
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