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- US CPI preview: Headline seen at 2.9% y/y, core at 3.1% y/y.
- Softer jobs and PPI data are reinforcing confidence that price pressures are easing.
- A cooler-than-expected print could fuel bets for a larger 50bps cut next week.
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The US dollar has found a little footing, while S&P 500 futures remain close to the fresh all-time high reached yesterday. The spotlight is firmly on today’s US inflation figures, with the August CPI release shaping up to be the last major hurdle before the Fed delivers its rate call next week.
What’s Expected from CPI?
Markets are looking for a headline CPI reading of 2.9% year-on-year and core inflation at 3.1% y/y. On a monthly basis, both headline CPI and core CPI are seen rising 0.3%, a pace suggesting that price pressures are easing but not vanishing altogether. That would be a mild uptick from the previous month, a reminder that disinflation isn’t yet a straight line lower.
In fact, headline CPI has been range-bound between 2.3% and 3.0% y/y for more than a year, and core inflation has actually ticked higher in recent months after briefly touching 2.8%. That stickiness makes it harder for the Fed to justify a more aggressive rate-cutting cycle, even with softer labour market data in hand.
PPI Surprise and Its Implications
Yesterday’s PPI release offered some comfort to the disinflation camp. Both headline and core PPI dropped 0.1% m/m, with July figures also revised lower, signalling easing pipeline pressures.
The biggest drag came from a hefty 1.7% fall in “trade services” – effectively a measure of corporate margins – suggesting firms are absorbing higher costs rather than passing them on, perhaps out of caution or to avoid alienating consumers. Together with weaker labour market data, this has opened the door to speculation that the Fed might even consider a 50bps cut next week, should CPI deliver another soft print.
Labour Market Looks Softer Than Thought
The employment side of the Fed’s dual mandate is also looking fragile. Last week’s NFP report undershot expectations, landing just as the Fed entered its pre-meeting blackout period, leaving investors to speculate on policymakers’ reaction. This was followed by a record -911k downward revision to March payrolls from the BLS – a bigger cut than forecast.
While the dollar didn’t sell off immediately on the news, gold surged to fresh record highs and the S&P 500 pushed to a new peak on expectations that the Fed may now deliver three cuts by year-end.
What Could the Fed Do Next?
With the labour market data now weaker than previously assumed and CPI potentially heading lower, the Fed could lean more decisively dovish next week. The base case remains a 25bps cut, but the updated dot plot may well hint at two more cuts before year-end, giving markets the reassurance they’ve been looking for.
Trading the CPI Report
For FX markets, the bias seems skewed towards further dollar downside if CPI comes in soft. That could encourage traders to reload shorts in the greenback, particularly against GBP and AUD. A hotter-than-expected reading, however, could revive dollar strength, with the yen most at risk given its recent weakness.
It’s worth remembering, though, that CPI isn’t the Fed’s preferred gauge – Core PCE is – but markets tend to react sharply to CPI since it lands first.
Equities would likely welcome a softer inflation number, while an in-line print shouldn’t spoil the bullish mood. A hotter surprise, on the other hand, could knock stocks back from their record highs as investors scale back expectations for aggressive cuts.
Final Thoughts
Taken together, weaker jobs data and a soft PPI release suggest that CPI is unlikely to deliver an unpleasant surprise on the upside. Even a 0.3% m/m result should reinforce confidence in the Fed’s path towards three 25bps cuts this year. It would also keep speculation over a jumbo 50bps cut next week in check – unless, of course, CPI dramatically undershoots expectations.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.