August CPI: Probably A 25 Bps Rate Cut Next Week

Economic

Summary:

August’s inflation data probably cement a 25 bps, rather than a 50 bps, reduction in the federal funds rate at next week’s FOMC meeting in our view. The 0.2% increase in headline CPI was in line with expectations, while the 0.3% increase in core CPI was slightly higher than consensus forecasts.

Another month of tepid food inflation and falling energy prices kept headline inflation in check. Excluding food and energy, the deflation in core goods remained in effect, led by a 1.0% drop in prices for used autos. A larger-than-expected drop in prices for core goods was more than offset by faster-than-expected services inflation. A bounce back in travel-services prices such as lodging away from home and airfares ended a run of unusually soft readings for these categories. Primary shelter inflation also came in high relative to our expectations and at odds with leading indicators from private sector data sources. Overall, we see the lingering split between goods and services inflation as a sign that the unwinding of pandemic-era effects on prices is taking somewhat longer, rather than as an indication disinflation is running out of steam.

On balance, the data suggest that a 25 bps rate cut is more likely than 50 bps next week, but we would not be completely shocked if the FOMC elected to move by 50 bps. Furthermore, starting with a 25 bps move does not rule out a pickup in the pace of policy easing at future meetings. The ongoing deterioration in the labor market has become an increasing focus for the FOMC, and inflation is slowly but surely returning to 2% on trend. The core CPI has increased at a 2.1% annualized pace over the past three months, a slow enough pace that 50 bps rate cuts at future meetings remain squarely on the table if the labor market data spur faster action. Regardless, all signs point to additional rate cuts beyond next week in our view.

Split Between Goods and Services Inflation Was Amplified in August

Inflation in August came in roughly in line with expectations, rising 0.2% in the month and 2.5% over the past year according to the Consumer Price Index. A relatively small 0.8% decline in energy prices in the month helped keep headline inflation in check, led lower by a 0.6% dip in gasoline prices and a 1.9% drop in utility gas service. Based on the limited data available for September and the recent trend in oil prices, another decline in energy prices appears likely to come in next month’s CPI release. Food inflation also continued its run of relatively benign gains, rising 0.1% in August. Price growth for food consumed away from home (0.3% month-over-month and 4.0% year-over-year) once again outpaced inflation at the grocery store (prices unchanged over the month and up 0.9% compared to one year ago).

Monetary policymakers like those at the Federal Reserve tend to focus on inflation excluding food and energy given that these two components are quite volatile and their prices are often determined by factors other than the stance of monetary policy. That said, headline inflation better reflects the price growth that consumers experience in their daily lives. Much slower food and energy inflation over the past year has brought good news for households on the inflation front. The 2.5% increase in the headline CPI over the past 12 months is more or less in line with where this indicator was on the eve of the pandemic (2.3% in February 2020).

Core inflation picked up in August, rising 0.3% after a 0.2% gain in July. The slower pace of disinflation when excluding food and energy comes amid what is still rather sticky services inflation. Core services prices advanced 0.4% in August, the largest increase since April. The moderation in shelter inflation remains painfully slow. Despite the notably lower pace of rental inflation signaled by private sector measures, primary shelter (the weighted average of rent of primary residences and owners’ equivalent rent) rose 0.5% in August. We have not given up the view that shelter inflation should slow more materially ahead, with the BLS’s All Tenant Rent Index having fallen sharply. That said, the stubbornly high pace of official shelter inflation raises some doubts about the extent to which it may ultimately ease further this cycle.

Core services ex-shelter also got a boost in August from higher travel-related prices (lodging away from home +1.8%, airfares +3.9%). Given that these categories are some of the more volatile components of core services, we are less concerned about their monthly rise in the context of further services disinflation ahead. Meanwhile, outright deflation in the goods sector continues. Core goods fell 0.2%, led by a drop in used autos (-1.0%). While auction prices point to a rebound in used vehicle prices over the next month or two, outside the auto space, goods prices also declined in August, signaling the benefits of smoother supply chains and cooler demand have yet to run their course.

While core prices rose more in August relative to the prior three-month average pace of monthly gains (0.13%), the early summer pace likely understated the trend in inflation just as the first quarter’s average gain of 0.37% seemed to overstate it. August’s figures likely give a somewhat cleaner read, in our view. The three-month annualized rate of core CPI inflation was just 2.1% in August, below the year-over-year pace of 3.2%. With food and energy related commodity prices having retreated of late and ongoing cooling in the labor market, we expect inflation to remain in check in the months to come.

The combination of the CPI report, last Friday’s employment report and recent communication from key Fed officials leads us to believe that the FOMC will reduce the federal funds rate by 25 bps at its meeting next week. That said, we would not be completely shocked if the FOMC opted for a 50 bps rate cut instead. Nonfarm payroll growth has slowed significantly in recent months, and the upward trend in the unemployment and under-employment rates is concerning. The pickup in core CPI inflation from July to August is unwelcome news for those hoping for a larger cut next week, but the underlying trend in price growth remains down in our view.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Alex

Forex

EUR/USD jumps to near 1.1100 in Friday’s European session. The major currency pair rises as the Euro (EUR) strengthens following the European Central Bank’s (ECB) monetary policy announcement on Thursday, and the US Dollar (USD) weakens after soft United States (US) Producer Price Index (PPI) data for August. The ECB cuts its Rate On Deposit Facility by 25 basis points (bps) to 3.50%, as widely anticipated.

The central bank was already expected to cut its key borrowing rates as the Eurozone economic outlook appears to have faltered due to a weak demand environment and price pressures in the old continent continue to decelerate.

The outlook of the Euro has improved due to the absence of a pre-defined interest rate cut path in the monetary policy statement and ECB President Christine Lagarde’s press conference. Comments from Lagarde indicated that the central bank will follow a data-centric approach, saying, "the interest rate decisions will be based on its assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation and strength of monetary policy transmission," at the press conference.

For the remainder of the year, market participants see the ECB reducing interest rates one more time as price pressures are expected to soften further. In the late Asian session, ECB policymaker Joachin Nagel told German radio Deutschlandfunk, "We assume that core inflation will improve, especially with the declining wage trend in the Eurozone.”

In the economic data front, Eurozone Industrial Production decreased by 2.2% year-over-year (YoY) in July, Eurostat reported on Friday. The number was better than the -2.7% expected and the -4.1% (revised from -3.9%) seen in June. On a monthly basis, Industrial Production decreased by 0.3%, as expected.

Daily digest market movers: EUR/USD gains as US Dollar slides further

EUR/USD strengthens at the expense of a weak US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its downside to near 101.00. The Greenback faces sharp selling pressure as market speculation for the Federal Reserve (Fed) to reduce interest rates by 50 basis points (bps) on Wednesday soars.

According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has increased sharply to 43% from 14% after the US PPI data release.

Thursday’s PPI data showed that the producer inflation grew at a slower-than-expected pace year-over-year in August. The headline inflation rose by 1.7%, slower than the estimates of 1.8% and from 2.1% in July, downwardly revised from 2.2%. In the same period, the core producer inflation – which excludes volatile food and energy prices – rose steadily by 2.4%, slower than expectations of 2.5%.

A slower pace in the price increase of goods and services at factory gates suggests a sluggish consumer spending trend, which historically prompts Federal Reserve (Fed) interest rate cut bets.

Going forward, investors will focus on the preliminary Michigan Consumer Sentiment Index data for September, which will be published at 14:00 GMT. The sentiment data is estimated to have remained almost steady at 68.0 from the prior release of 67.9.

Technical Analysis: EUR/USD bounces back strongly from 1.1000

EUR/USD soars after retesting the breakout of the Rising Channel chart pattern formed on a daily timeframe near the psychological support of 1.1000. The near-term outlook of the major currency pair has strengthened as it has climbed above the 20-day Exponential Moving Average (EMA), which trades around 1.1055.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range. A bullish momentum would trigger after breaking above 60.00.

Looking up, last week’s high of 1.1155 and the round-level resistance of 1.1200 will act as major barricades for the Euro bulls. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.

Source: FXSTREET

Risk Warnings and Disclaimers

Add to Favorites

Samantha Luan

Forex

Economic

ECB lowers rates to 3.5%

The European Central Bank delivered as expected on Thursday, trimming the key interest rate by 25 basis points to 3.5%. This was the second rate cut in the current rate-lowering cycle, as the ECB responded to falling inflation and a deteriorating eurozone economy.

The war against inflation is largely won, which enabled the ECB to deliver the rate cut. Inflation in the eurozone has dropped to 2.2%, close to the target of 2%. The ECB updated inflation forecast was unchanged from June, with inflation expected to average 2.5% in 2024 and 2.2% in 2025

At a press conference, ECB President Lagarde reiterated that rate decisions would be made “meeting by meeting” based on economic data, essentially ditching forward guidance. Lagarde sounded somewhat hawkish, noting that wage growth remains high and the labor market is still resilient. The ECB is being cautious and has signaled it will take a slow approach to further cuts and the markets are looking at a cut in December. If economic conditions suddenly worsen, the central bank would have to consider a rate cut next month.

The Federal Reserve meets next week and rate cut odds continue to swing wildly. The US producer price index eased to 1.7% y/y in August, down from a downwardly revised 2.1% in July and below the market estimate of 1.8%. This sent the odds of a half-point cut soaring to 41%, up from just 13% yesterday, according the CME’s FedWatch. The Fed meeting is live, with plenty of uncertainty as whether the Fed will cut by 25 or 50 basis points.

EUR/USD Technical

EUR/USD faces resistance at 1.1099 and 1.1123

There is support at 1.1052 and 1.1028

Source: ACTIONFOREX

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Alex

Forex

Commodity

Gold (XAU/USD) is exchanging hands in the high $2,560s on Friday, trading about 0.40% higher on the day after posting new record highs on Thursday when it broke decisively out of a range it had been oscillating in since it peaked on August 20.

The initial catalyst for the breakout was the release of mixed “factory gate” price inflation data, or Producer Price Index (PPI) data out of the US for August. The figures showed a deeper-than-expected slowdown in headline PPI, and although core PPI remained sticky, the market reacted as if the data was disinflationary.

Gold extends rally after media reignites debate over 0.50% vs 0.25% Fed cut

Gold continued to rally during Friday’s Asian session due to the revival of the debate over whether the Federal Reserve (Fed) will cut interest rates by 0.50% or 0.25% at its meeting next Wednesday.

The release of still-high core consumer price inflation data, in the form of the Consumer Price Index (CPI) on Wednesday, had seemingly put to bed hopes of a “jumbo” 0.50% (50 pbs) cut. However, an article by a respected The Wall Street Journal (WSJ) Fed Watcher Nick Timiraos, as well as comments from former President of the New York Fed William Dudley, suggested a 0.50% should still be considered. This, in turn, led to a fall in US Treasury yields, a sell-off in the US Dollar (USD), and a rally in Gold’s price.

Lower interest rates are positive for Gold because it reduces the opportunity cost of holding the non-interest-bearing asset, making it more attractive to investors.

Technical Analysis: Gold pushes to record highs as broad uptrend resumes

Gold (XAU/USD) breaks out of its multi-week sideways range and surpasses the previous record highs of $2,531.

The longer-term trend for Gold is bullish, and according to technical analysis theory, since “the trend is your friend,” this favors a continuation of the uptrend.

XAU/USD 4-hour Chart

The precious metal has met its previous target at $2,550, generated after the original breakout from the July-August range on August 14, and now sets its sights on the next target at around $2,590.

Gold is overbought, however, according to the Relative Strength Index (RSI). This advises long holders not to add to their positions because of an increased risk of a pullback materializing.

If the RSI exits overbought, it will signal a correction is unfolding. If such a correction unfolds, it will likely find support either at the $2,550 prior target or firmer support lower at the $2,531 former high.

The trend on all timeframes remains bullish, however, suggesting any correction will eventually run out of steam and the broader uptrend will resume, pushing the yellow metal to new highs.

Source: FXSTREET

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Stocks

London stocks edged up quiet trade early on Friday, with little in the way of market-moving news to provide any direction.

At 0845 BST, the FTSE 100 was up 0.2% at 8,259.89.

Derren Nathan, head of equity research at Hargreaves Lansdown, said: "After an ugly start to September, historically a poor month for equity returns, global stock markets are broadly back to where they ended last month. There’s not been any major catalyst for this rebound, more so a lack of negative surprises on the inflation front. That trend continued yesterday with US producer price rises up 1.7% in the year to August against expectations of 1.8%.

"That helped the S&P 500 to end the day up fractionally, with the tech-dominated Nasdaq composite faring a bit better adding 0.5%, in a third consecutive day of gains. Over the week, all major US indices are in positive territory.

"However, the data may not be enough to persuade the Fed to cut rates by any more than a quarter-point next Wednesday, in what’s expected to be the first reduction in the Federal Funds Rate in over four years."

There are no UK data releases of note due but in the US, investors will eye the University of Michigan's preliminary consumer sentiment survey for September at 1500 BST. Before that, eurozone industrial production data for July is due at 1000 BST.

In equity markets, Fresnillo and Endeavour shone as gold prices reached new record highs of over $2,500 per ounce.

Nathan said: "The glittering performance has been buoyed by sustained high levels of purchases by central banks in the face of a weakening dollar, geopolitical uncertainty and the downward looking trajectory for interest rates. These conditions could persist for a while so there’s potential for the high-water mark to rise further in the coming months."

Vodafone was in the black despite the Competition and Markets Authority saying that its planned merger with Three may be expected to result in a “substantial” lessening of competition and higher prices for consumers.

The competition watchdog cited the supply of mobile telecommunications services to end customers and the supply of wholesale as two areas of concern.

Paddy Power owner Flutter Entertainment fell as it announced the acquisition of a a 56% stake in NSX Group, a Brazilian operator of the Betnacional brand, for around $350m.

Flutter said the deal fully aligns with its strategy to invest in leadership positions in international markets, “securing a podium position for Flutter on completion in the regulating and fast-growing Brazilian market”.

Infrastructure group Balfour Beatty edged up after it was awarded a £363m contract by National Grid to deliver the Bramford to Twinstead Reinforcement project.

In broker note action, AstraZeneca was knocked lower by a downgrade to ‘sell’ at Deutsche Bank.

Rio Tinto ticked higher after an upgrade to ‘outperform’ at Macquarie.

Source: ShareCast

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Forex

The USD/CAD pair consolidates inside Thursday’s range slightly below the round-level resistance of 1.3600 in Friday’s European session. The Loonie asset remains sideways despite sheer weakness in the US Dollar (USD), suggesting that the Canadian Dollar (CAD) is also performing weakly.

S&P 500 futures have posted decent gains in the European session, exhibiting a strong risk appetite of investors. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 101.00. The appeal of risk-perceived assets has improved as market speculation for the Federal Reserve (Fed) to start the policy-easing process aggressively has strengthened.

The CME FedWatch tool shows that the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has increased sharply to 43% from 14% on Thursday. Fed large rate cut bets were prompted after the release of the United States (US) Producer Price Index (PPI) data for August, which showed that the producer inflation rose at a slower-than-estimated pace year-on-year.

US core PPI – which excludes volatile food and energy prices – rose steadily by 2.4%, while economists expected the underlying producer inflation to have grown by 2.5%. The headline PPI decelerated to 1.7% from the estimates of 1.8% and the former release of 2.1%. Soft PPI data has diminished fears for price pressures remaining persistent.

Meanwhile, a sharp weakness in the Canadian Dollar appears to be the outcome of firm expectations that the Bank of Canada (BoC) will extend the policy-easing cycle in the October policy meeting. The BoC has already slashed its interest rates by 75 basis points (bps) this year and more rate cuts seem warranted due to lingering growth worries. The Canadian labor market has been hit hard due to the maintenance of a restrictive interest rate stance by the BoC for a longer period.

Source: FXSTREET

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

The dollar slumped to its lowest this year on Friday versus the yen while gold hit a record high as investors ratcheted up bets for a super-sized Federal Reserve interest rate cut next week.

Shares in Asia also advanced after traders raised bets back to 45% for a 50-basis point U.S. rate cut on Sept. 18, according to LSEG data at 0510 GMT, from about 28% before articles in the Financial Times and Wall Street Journal each called the decision "a close call".

Influential former New York Fed President Bill Dudley later said at a forum in Singapore "there's a strong case for 50."

"This is yet another twist in the (Fed rate cut) debate," said Tony Sycamore, an analyst at IG, noting the tug-of-war being played out in bond futures and the dollar-yen rate in particular.

"Everybody thought we were back on track for 25 basis points, and now 50 is suddenly back on the table."

The dollar dropped as much as 0.81% to 140.645 yen , the weakest level since Dec. 28.

The yen has also been supported this week by hawkish comments from Bank of Japan officals, with policy board member Naoki Tamura on Thursday saying he was "worried that upside inflation risk was heightening."

The dollar index , which measures the currency against the yen and five other major rivals, dropped to a one-week trough at 101.00.

Commonwealth Bank of Australia strategist Carol Kong says current pricing for Federal Open Market Committee (FOMC) easing is too high.

"We continue to favour a 25 bp cut over a 50 bp cut, because the labour market and the broader economy remains resilient," she wrote in a note.

"Current market pricing is aggressive compared to the average FOMC rate cutting cycle outside of recessions. We, along with the consensus of U.S. economists, do not expect the U.S. economy to enter a recession."

The euro added 0.07% to $1.1083, building on Thursday's 0.57% advance after European Central Bank President Christine Lagarde pushed back on prospects of a rate cut in October, following a widely expected quarter-point reduction on Thursday.

Gold extended Thursday's 1.9% climb to reach a fresh record of $2,570.03, buoyed by the dollar's weakness.

MSCI's broadest index of Asia-Pacific shares outside Japan rallied 0.48%.

Hong Kong's Hang Seng led advances in regional markets, gaining 0.94%. Mainland Chinese blue chips added 0.09%, despite expectations that more weak economic data will be released on Saturday.

Australia's benchmark climbed 0.25%. South Korea's Kospi edged down 0.1%.

Japanese stocks underperformed, though, dragged lower by the stronger yen, with the Nikkei losing 0.35%.

Japan, mainland China and South Korea are all heading into long weekends, with Tokyo back on Tuesday, China on Wednesday and South Korea not until Thursday.

U.S. stock futures added 0.1%, following gains on Thursday for the cash indexes.

Pan-European STOXX 50 futures advanced 0.42%.

Crude oil continued to climb after surging around 2% overnight, as producers assessed the impact on output after Hurricane Francine tore through the Gulf of Mexico.

U.S. West Texas Intermediate crude futures rose 0.71% to $69.46 per barrel, building on Thursday's 2.5% rally. Brent crude futures added 0.65% to $72.44, after a 1.9% jump in the previous session.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Daily News

Remarks of Officials

Central Bank

Forex

FastBull Events

FastBull Featured

Devin

Mohammad Omar

Recent Searches

Top Searches

Markets

News

Analysis

User

24/7

Economic Calendar

Education

Data

August CPI: Probably A 25 Bps Rate Cut Next Week

Split Between Goods and Services Inflation Was Amplified in August

EUR/USD Approaches 1.1100 on Firm Fed Large Rate Cut Prospects

Daily digest market movers: EUR/USD gains as US Dollar slides further

Technical Analysis: EUR/USD bounces back strongly from 1.1000

Source: FXSTREET

Euro Rises after ECB Cuts Interest Rates

ECB lowers rates to 3.5%

EUR/USD Technical

Source: ACTIONFOREX

Gold Gets Lift as Media Revives Debate over Fed Rate Cuts

Gold extends rally after media reignites debate over 0.50% vs 0.25% Fed cut

Technical Analysis: Gold pushes to record highs as broad uptrend resumes

Source: FXSTREET

London Open: Stocks Edge Up in Quiet Trade

Source: ShareCast

USD/CAD Steadies Below 1.3600 Despite Weak US Dollar

Source: FXSTREET

Dollar Dives to 2024 Low, Gold at Record High on Revived Bets for Jumbo Fed Cut

Source: Reuters

Risk Disclosure