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US CPI could give US markets another nudge lower

inflation graph

It was another disappointing session for the FTSE100 yesterday as the UK blue chip closed at an 18-month low, dragged lower by a sharp fall in banks and house builders as a result of a sharp rise in long term yields.

This rise in yields has been driven over concerns about the fiscal plans of the UK government as well as the prospect of a bumper rate hike by the Bank of England in November.

US markets also underwent a difficult session with the S&P500 languishing close to 18-month lows, along with the Nasdaq 100.

Last night’s Fed minutes contained little in the way of surprises, with central bank officials indicating that rate hikes were likely to continue, given that inflation remained unacceptably high, and that it was likely to remain higher for longer than expected.

A little surprisingly, yields slipped back in the aftermath of the release of the minutes despite there being little sign of any shift in thinking, with the expectation that another 75bps rate hike is coming at the beginning of November.

The slight softness may well have been a sentence which seemed to indicate that early signs of significant adverse effects on the economic outlook might require a recalibration of policy in order to mitigate the risk of a sharp downturn.

While this may seem like clutching at straws, this week’s comments by Fed vice chair Lael Brainard voicing concern about the prospect of policy lags, and the impacts of such lags on the US economy, could well be construed as the very first signs of unease coming to the fore, after three successive 75bps rate hikes with the prospect of a 4th on the way in November.

No one could describe this is a pivot, but it does indicate that the Fed may well find that it may not be able to hike rates as much as it originally thought a few months ago.

Today’s US CPI numbers for September aren’t likely to alter the dial that much when it comes to a 75bps rate move in three weeks’ time, given the way the US dollar reacted with respect to the higher-than-expected August numbers. 

Even though headline CPI slipped back to 8.3% from 8.5%., a surge in core prices saw a big move higher in the US dollar as well as yields, after core prices rose sharply from 5.9% to 6.3%, a bigger than expected increase.

The big rise in core prices would appear to suggest that inflation is likely to be much stickier over the next few months that markets had originally been hoping, thus adding to the risk we could see the Federal Reserve not only be much more aggressive on rate hikes, but keep those rates higher for longer.

Powell has already gone on the record that the Fed will keep at it until there is clear evidence that inflation is on a sustainable downward path, and while core prices are expected to fall again in September to 8.1%, core prices are expected to rise from 6.3% to 6.5%.

It will take a sizeable miss on both numbers to the downside to alleviate the upward pressure on yields and downward pressure on stocks.

This doesn’t come across as likely now while a strong number will send yields back up and further increase downward pressure on the likes of the Nasdaq and S&P500, pushing them both below their recent lows and on to further losses.

On the plus side energy prices have continued to slip back, which is good news from a consumer point of view, however with businesses now biting the bullet and pushing prices up, any hopes of a respite in inflationary pressure appear to be quite some way off.

Core prices are now the main focus here, with less emphasis on the headline CPI rate, which should continue to come down..  

EUR/USD – finding support at the 0.9670 for the time being. We remain in the wider downtrend, keeping the bias for further losses towards 0.9000. A break above parity and the 50-day SMA is needed to signal a short squeeze, towards 1.0200. 

GBP/USD – another choppy session for the pound saw a slide to 1.0925, before a strong rebound back above the 1.1100 area, although we are still below the Tuesday peaks of 1.1180. A move through 1.1200 could see 1.1500, however the bias remains lower while below 1.1200.  

EUR/GBP – failed at the 0.8870 area sliding back sharply, below 0.8820 and reopening the prospect of a return to the 0.8720 area and Tuesday lows. A fall through 0.8720 opens the risk of a move towards 0.8670.   

USD/JPY – still looking well supported and has finally taken out the pre-intervention peaks at 145.90, bringing the previous 1998 peaks at 147.70 into play. Bias remains higher towards 150.00, while above the lows last week at 143.50. 

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