Sept. Rate Hike Still On the Table, but Lower CPI Could Slow Pace of Future Fed Rate Hikes

U.S. Treasury yields fell on Thursday after the release of the CPI report. The news won’t take the September rate hike off the table, but when combined with yesterday’s weaker-than-expected producer inflation, it could slow down the pace of future rate hikes.
James Hyerczyk

Weaker-than-expected U.S. consumer inflation data is helping to generate most of the activity in the markets on Thursday. This news is having an effect on U.S. Treasury yields which is helping to fuel a reaction in the U.S. equity and Forex markets. Forex traders are also reacting to central bank decisions in Europe and the United Kingdom.

U.S Consumer Inflation Report

On Thursday, the U.S. Commerce Department said the consumer price index (CPI) rose 0.2 percent in August. This was lower than economist estimates for a 0.3 percent gain. In the 12 months through August, the CPI increased 2.7 percent, slowing from July’s 2.9 percent rise.

The so-called core CPI edged up 0.1 percent. Traders were looking for an increase of 0.2 percent in August. In the 12 months through August, the core CPI increased 2.2 percent after rising 2.4 percent in July.

U.S. Treasury Markets

U.S. Treasury yields fell on Thursday after the release of the CPI report. The news won’t take the September rate hike off the table, but when combined with yesterday’s weaker-than-expected producer inflation, it could slow down the pace of future rate hikes.

Some traders are also saying that this may serve as proof that higher wages aren’t translating to demand-side inflation and consequently it may mean that there is no urgency for the Fed to continue raising rates each quarter. It also means the central bank is likely to continue raising rates gradually then making adjustments as need be.

U.S. Dollar

Weaker Treasury yields helped make the U.S. Dollar a less-attractive investment on Thursday. Furthermore, the data suggests the Fed may have hit the sweet spot as far as interest rates are concerned. This could mean the Fed has reached the normalization zone.

Hitting the normalization zone will mean the Fed will neither increase nor decrease interest rates. This is potentially bearish for the dollar because the other major central banks are likely to begin raising rates. This would make their currencies more attractive investments than the U.S. Dollar.

U.S. Equity Markets

U.S. stock investors liked the CPI miss and are showing their reaction by driving equities higher. Stock investors had grown fearful of rising inflation recently and the possibility of aggressive rate hikes by the Fed. Today’s data and yesterday’s PPI report suggests inflation may not be running away after all.

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European Central Bank and Bank of England

The European Central Bank (ECB) kept interest rates unchanged as expected.  However, the central bank did announce only a nuanced change in its guidance to remain on track for ending bond buys in December and keeping record low rates at least through next summer.

Additionally, the Bank of England also held rates steady, but did highlight expectations of uncertainty over Brexit.

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