US Inflation Could Spark Volatility in Summer Markets

By:
Lukman Otunuga
Published: Aug 9, 2022, 10:24 UTC

Tomorrow sees the release of the latest US inflation data which is expected to show that price pressures still abound and are way above the Fed’s 2% target.

US Dollar FX Empire

Written on 09/08/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

US CPI set to spark fireworks in summer markets?

Summer markets historically mean low volumes and quiet flows. Traders are on vacation and risk taking is in go-slow gear until trading desks are fully manned again in September. But that doesn’t mean we don’t get volatility and certainly some head-scratching trying to rationalise price action.

Tomorrow sees the release of the latest US inflation data which is expected to show that price pressures still abound and are way above the Fed’s 2% target. Volatility could follow for sure, and it also means the world’s most important central bank should remain in rate hiking mode until the end of the year.

There’s no doubt some PMI surveys have been indicating slowing price pressures, especially as commodity markets have eased, while year-ago base effects will shift to pulling inflation rates lower. The headline inflation rate is forecast to rise just 0.2% on a monthly basis which would be the smallest gain since January 2021 and slow the annual figure to 8.7% from 9.1%.

But the core rate, which strips out volatile food and energy factors, is forecast to get a further lift from rising housing costs and post a 0.4% monthly gain. This should see keep the year-on-year rate at 6% and definitely focus the minds of policymakers.

After the blockbuster jobs report and full recovery in nonfarm payrolls seen last week, markets have priced in another 75-basis point hike for the Fed’s September meeting. Recession fears have abated with accelerating wage growth and unemployment falling back to multi-decade lows.

The recent pushback by numerous FOMC officials that it wasn’t done hiking rates has also gained increasing credibility. But we still have over six weeks until the next FOMC meeting, with more CPI and non-farm payrolls data to be released.

Bottom line

Pressure will grow on policymakers to hike rates by another jumbo-sized move if core CPI remains hot. Some Wall Street strategists are even suggesting a 100-basis point rate hike could be on the cards. Money markets have priced rates to go to 3.5% by year end and tomorrow’s data is likely to support this pricing and underpin the dollar bid seen recently.

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About the Author

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets.

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