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US CPI set to soften further in August, UK wages in focus

A row of petrol pump nozzles

Weakness in European natural gas prices, along with optimism that US inflation may well see another big fall later, today helped markets in Europe close higher for the second day in a row yesterday.

US markets also enjoyed another positive session closing higher for the fourth day in succession, with the gains being driven by energy, as well as consumer discretionary retail.

The announcement of an energy price cap last week by the UK government, along with reports that the EU is looking to implement measures of its own has given a respite to the hard pressed retail sector.

As we look ahead to today’s European open the main focus will be on US CPI numbers for August, followed by PPI tomorrow, as hopes grow that we may well have seen the peak, in the US at least.

Before that we get to parse some important UK economic numbers. Have we seen peak UK CPI in the wake of last week’s huge energy price package? We should find out tomorrow, but before that we have the latest unemployment numbers for the 3 months to July which is expected to remain unchanged at 3.8%.

Of much greater importance will be the latest average weekly warnings numbers which, while quite strong, are well below the cost of living, although they have been rising at a steady rate since January, when wage growth was at 3.8%.

Since then, we’ve seen gradual increases on a month to month basis rising to 4.7% in June, excluding bonuses. Including bonuses, we saw the 3-month rate rise to 5.1% in June and this is expected to rise again in July to 5.4%,  helped by one-off payments from employers to help out staff who are finding the sharp rises in energy bills difficult to absorb.

In July we saw US CPI fall back from 9.1% to 8.5% prompting speculation that the Federal Reserve might have to start slowing down the pace of its rate rise cycle, with a view to starting to cut rates sometime in 2023. Since Powell’s Jackson Hole speech market expectations around the prospect of rate cuts in 2023 have shifted, helped by hawkish reinforcement from the likes of Neel Kashkari of the Minneapolis Fed, James Bullard of the St. Louis Fed and Esther George of the Kansas City Fed who appear to be leaning towards the prospect of a 75bps move next week.

With the Federal Reserve in its pre FOMC blackout period for when it meets on 21st September today’s CPI reading might offer a steer as to whether we see a 50bps rate hike at that meeting or another 75bps rate move.

A word of warning is needed here, because even if we get a softer CPI print that won’t necessarily mean that the Fed will favour the softer option of a 50bps rate move, which on the face of it would appear to be the more logical course of action, especially if we do see a slide from 8.5% to 8.1%.

The problem with this scenario is that any soft pedalling on inflation at this point on the part of the Fed could unwind the tightening of financial conditions that we’ve seen since Jackson Hole.

Furthermore, if the US central bank is to hold the line on its narrative of a Fed funds rate of between 3.5% to 4% then it really needs to be bold next week and implement another 75bps rate rise irrespective of today’s CPI number, as well as tomorrow’s PPI.

After next week’s rate meeting the Fed will only have another two opportunities this year to raise rates. With a lot of US policymakers calling for a front-loading approach, the odds appear to favour a 75bps move if markets are to be convinced the US central bank is serious about driving inflation lower on a “sustainable basis” which means today’s inflation numbers might not be terribly instructive.

EUR/USD – pushed through the 50-day SMA but have thus far failed to crack trend line resistance from the highs this year at 1.0200. A break through 1.0200 is needed to signal further gains. Support comes in at 0.9980. 

GBP/USD – squeezed back above the 1.1700 area but needs to push up to the 1.1800 to offer any hope of a respite. Below 1.1400 targets 1.1000. 

EUR/GBP – continues to find resistance at the 0.8720/30 level with another failure yesterday, slipping back to the 0.8650 area. A move below 0.8630 opens up the 0.8580 area.  

USD/JPY – still in the uptrend from the August lows despite falling back from the 145.00 area. A move below 141.00 could signal further declines towards 139.80.

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