U.S. August CPI: Housing Inflation Remains Firm, Dampening 50bp-Cut Expectations

Economic

Data Interpretation

Summary:

U.S. August CPI rose 2.5% YoY, easing for the 5th month, according to data from the U.S. Bureau of Labor Statistics on Wednesday. However, persistent housing inflation led to a slightly higher-than-expected core CPI increase of 0.3%, which suggests that the Federal Reserve might proceed cautiously with rate cuts.

On September 11, ET, the U.S. Bureau of Labor Statistics released the August CPI report.

CPI grew by 0.2% on a monthly basis in August, compared to the expected 0.2% and the previous 0.2%.

CPI grew by 2.5% year-on-year in August, while the expected rate was 2.6% and the previous rate was 2.9%.

Core CPI rose by 0.3% from a month ago in August, compared to the expected 0.2% and the previous 0.2%.

Core CPI rose by 3.2% from a year earlier, while the expected rate was 3.2% and the previous reading was 3.2%.

A 2.5% YoY increase in CPI was sharply lower than the previous 2.9% reading, marking the lowest level since February 2021. The 0.2% monthly growth was in line with expectations and the same as the previous rate. However, the 0.3% monthly growth of core CPI was higher than expected as well as the previous 0.2%, becoming the largest growth in 4 months.

Core CPI ascended unexpectedly in August, mainly due to the accelerated growth of the housing inflation, which grew by 0.5% MoM, the highest growth this year, and by 5.2% YoY. Owners' equivalent rent, or OER, increased by 0.5%, higher than July's reading.

Food prices rose by 0.1% in August, 0.1 percentage point lower than in July. After holding steady in July, the energy price dropped 0.8% MoM in August. In the auto market, used car prices declined by 1.0%, slower than the previous drop of 2.3%. At the same time, the insurance for automobiles rose by 0.6%. The airline fares, after declining for 5 consecutive months, rose by 3.9% in August.

Despite the headline inflation in the U.S. making a solid step toward the Fed's target, core inflation remains sticky due to rising housing prices. Concerns over persistent inflation might prompt the Fed to proceed with rate cuts more cautiously. Following the data release, the market reduced bets on a 50-bps rate cut by the Fed in September. Currently, there's an 85% probability of a 25-bps cut in September, while the chance of a 50-bps cut stands at 15%.

August CPI Report

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ACY

Forex

The British pound has come under renewed pressure against the US dollar, with the GBP/USD pair nearing the critical 1.3000 level. This represents a significant retracement from the late-August highs of around 1.3266, driven by the strengthening US dollar. A key factor in the dollar's resurgence has been the reduced likelihood of a larger, 50 basis point interest rate cut by the Federal Reserve in the near term. However, despite the tempered expectations for immediate aggressive action, markets continue to price in a total of approximately 110 basis points worth of Fed rate cuts by the end of the year and as much as 225 basis points by mid-2024.

GBP/USD Under Pressure as Diverging Central Bank Policies Shape Market Sentiment_1

The growing divergence between the Federal Reserve and the Bank of England (BoE) in terms of their monetary policy trajectories is becoming increasingly pronounced. This divergence is creating uncertainty and volatility within the forex markets, particularly for the GBP/USD pair. The Fed's anticipated pivot to a more accommodative stance has been fuelled by mounting concerns about the health of the US economy. Investors are increasingly expecting a cooling labour market and a further deceleration in inflation, both of which would necessitate a more dovish approach from the Fed.

Fed's Focus Shifts to Labour Market Dynamics

Fed policymakers have been increasingly clear that the state of the labour market will be a critical component in future rate decisions. With inflation showing signs of easing, the Fed now has the flexibility to shift its attention to employment data. Any significant cooling in the job market would likely bolster the case for rate cuts. On the other hand, if labour market data continues to defy expectations, with stronger-than-anticipated job growth or wage inflation, the Fed might be forced to reevaluate the timing and scope of its policy adjustments.

As the US presidential race intensifies, political developments are also playing a larger role in market dynamics. The highly anticipated debate between Vice President Kamala Harris and former President Donald Trump has garnered attention from both political analysts and financial markets. With recent polls indicating a tight race, any unexpected developments during the debate could inject volatility into the currency markets, particularly for the US dollar, as investors recalibrate their expectations based on potential shifts in fiscal policy and economic strategy.

BoE's Cautious Stance Reflects Domestic Challenges

In contrast to the Federal Reserve's increasingly dovish tone, the Bank of England is expected to take a more cautious approach to monetary easing. The market is currently pricing in approximately 50 basis points of BoE rate cuts by the end of the year, with a further 125-150 basis points of cuts anticipated by mid-2024. However, the BoE's next rate cut is unlikely to occur until its November policy meeting, following a contentious decision to begin the rate-cutting cycle earlier in the year.

The UK labour market report presented a somewhat mixed picture, which could have significant implications for the BoE's decision-making process. Employment growth was robust, with an increase of 265,000 jobs over the three months leading up to July, marking the strongest employment gains since May 2022. This uptick in job creation suggests that the UK economy may be recovering more rapidly than expected, adding complexity to the BoE's policy considerations. However, wage growth data revealed a more nuanced story, with regular average weekly earnings increasing at a slower pace of 5.1% in July — the lowest in over a year.

While the deceleration in wage growth aligns with the BoE's goal of containing inflation, median pay rose by 6.2% year-on-year in August, painting a more complicated picture of the labour market's health. This mixed data could lead to further debate within the BoE regarding the timing and scale of future rate cuts. Should the UK economy continue to exhibit resilience, with stronger labour market performance, the BoE may find less urgency to act aggressively, potentially lending support to the pound in the short term.

The current divergence between the Fed and the BoE reflects broader differences in their respective economic landscapes. While the Fed is grappling with a decelerating economy and the possibility of inflation continuing to ease, the BoE is contending with a relatively resilient job market and wage growth that may stoke domestic inflationary pressures. This divergence has created uncertainty around the future trajectory of the GBP/USD pair, as both currencies are being influenced by unique domestic challenges and risks.

In the near term, the performance of the US dollar will likely hinge on economic data and political developments. The Fed's path to rate cuts appears to be set, but any surprises in inflation or employment could spark volatility. Meanwhile, the pound's outlook is tied closely to the BoE's cautious approach and how the UK economy performs relative to market expectations. Should the UK continue to display resilience, the pound may find support, but any signs of economic weakness or political instability could leave the GBP/USD pair vulnerable to further downside.

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[Quick Facts]

1. Hamas rejects any new conditions in the Gaza ceasefire deal.

2. Housing inflation remains resilient, dampening 50bp-cut expectations.

3. WSJ's Timiraos says shelter inflation makes bigger rate cut less likely.

4. BOE will not cut rates in Sep. despite weak economic growth.

[News Details]

Hamas rejects any new conditions in the Gaza ceasefire deal

In a statement, Hamas said that it remains positive and flexible in reaching a ceasefire agreement and it is willing to implement the ceasefire based on the Gaza proposal previously presented by the U.S. and related UN Security Council resolutions. Hamas emphasized it would not introduce any new demands during negotiations and rejected any new conditions from other parties. It also stated that the management of Gaza is a matter of internal Palestinian affairs. Hamas welcomed Egypt and Qatar's mediation efforts, supporting their continued role in facilitating the ceasefire.

Housing inflation remains resilient, dampening 50bp-cut expectations

On Wednesday, the U.S. Bureau of Labor Statistics released data showing a 2.5% year-over-year increase in the August CPI, down from 2.9% in July, marking the fifth consecutive month of slowdown. It rose 0.2% from a month ago, in line with expectations. However, persistent housing inflation led to a slightly higher-than-expected core CPI increase of 0.3%, which suggests that the Federal Reserve might proceed cautiously with rate cuts. After the data release, traders reduced their bets on a 50 basis points rate cut in September, with a 25bp cut now having an 85% chance and a 50bp cut just 15%.

WSJ's Timiraos says shelter inflation makes bigger rate cut less likely

Nick Timiraos, chief economics correspondent for The Wall Street Journal (WSJ), noted that a firm shelter inflation reading pushed core inflation higher than expected, lowering the chance of a 50 basis points rate cut at next week's meeting. Officials had hinted at a rate cut, and Wednesday's CPI data would not change that. However, some officials haven't completely ruled out a cut bigger than 25 basis points.

BOE will not cut rates in Sep. despite weak economic growth

Barclays economists Jack Meaning and Abbas Khan pointed out that the U.K.'s weak economic performance in July, where growth remained flat, may catch the attention of Bank of England (BOE) policymakers, possibly reinforcing the belief that initiating an easing cycle in August was the right move and that further cuts will be needed in the coming months. However, they stated that July's lackluster growth won't be enough to force a 25 basis points rate cut at this month's meeting. They added that the third-quarter growth in the U.K. is expected to remain positive, though slower than the first half of the year. Barclays forecasts 0.4% quarterly growth for Q3, in line with the projection of the Bank of England.

[Today's Focus]

UTC+8 20:15 ECB Rate Decision (Sep)

UTC+8 20:30 U.S. PPI (Aug)

UTC+8 20:45 ECB President Lagarde's Monetary Policy Press Conference

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

Risk Warnings and Disclaimers

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Owen Li

Central Bank

The Bank of Japan (BoJ) board member Naoki Tamura crossed the wires during the Asian session on Thursday, saying that the path towards ending the easy policy is still very long.

Key Quotes:

Japan's neutral rate is likely to be around 1% at the minimum.

Will carefully examine the pros and cons of exiting easy policy.

Must push up short-term rates at least to around 1% by latter half of our long-term forecast period through fiscal 2026, to stably achieve 2% inflation target.

Must raise short-term rates in several stages while scrutinising how economy, inflation respond to such steps.

Will keep close eye out on financial market moves and their impact on economy, prices.

Must raise rates at appropriate timing and in several stages.

Pace at which markets expect boj to hike rates is very slow, hiking at such pace could further heighten upward inflation risk.

Expect consumption to rise moderately thanks in part to reversal of one-sided, sharp Yen falls.

Likelihood of japan sustainably achieving BoJ’s price target heightening further.

Personally see upward inflation risk heightening.

Market Reaction:

The hawkish remarks reaffirm market expectations for an additional interest rate hike by the BoJ in 2024 and offer some support to the Japanese Yen (JPY), capping the USD/JPY pair's recovery from a multi-month low near the 143.00 mark.

Source: FXSTREET

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TD Securities

Economic

The Consumer Price Index (CPI) rose 0.2% month-on-month (m/m) in August, bang-on the consensus forecast. On a twelve-month basis, CPI fell to 2.5% (from 2.9% in July).

Energy prices (-0.8% m/m) were a drag on headline inflation, with both energy commodities and energy services lower on month. Food prices remained largely subdued, rising 0.1% m/m and are up 2.1% year-over-year (y/y).

Excluding food and energy, core prices rose 0.3% m/m, following a gain of 0.2% m/m in July. This came in above the consensus forecast, which called for a more modest gain of 0.2% m/m. The twelve-month change on core held steady at 3.2%, while the three-month annualized ticked up to 2.1% (from 1.6% in July).

Price growth on core services rose 0.4% m/m, a slight acceleration from the 0.3% m/m gain recorded the month prior.

Shelter costs unexpectedly rose by 0.5% m/m, higher than the 0.4% m/m gain recorded in July. The uptick was largely driven by a further gain in Owners’ Equivalent Rent (OER), which rose 0.5% m/m, or a tick above the monthly gain averaged over the twelve-months prior – suggesting some mean reversion in the months ahead.

Non-housing services inflation (aka ‘supercore’) also accelerated last month, rising by 0.4% m/m. The gain was largely driven by a further increase in motor vehicle insurance (+0.6% m/m) and travel related costs including airfares (+3.9% m/m) and lodging away from home (+1.8% m/m). However, the three-and-six-month annualized rates of change remain relatively subdued at 1.4% and 2.9%, respectively.

Core goods prices declined by 0.2% on the month, largely due to a further decline in in used vehicle prices (-1.0% m/m), medical & education commodities (-0.4% m/m) and home furnishings (-0.3% m/m). Goods prices have been flat or have registered a decline in each of the last 15 months.

Key Implications

The inflation report was another reminder that there’s going to be bumps in the road in returning inflation back to the Fed’s 2% target. That said, the uptick in core was largely driven by an unexpected gain in shelter costs (mainly related to OER), which is unlikely to persist. Encouragingly, core goods prices remain in deflation, while overall price pressures on non-housing services remain relatively subdued.

In our view, the August readings of employment and inflation have done little to strengthen the case for a larger 50 basis point (bps) rate cut next week. Instead, the Fed is likely to play it cool and cut rates by just 25 bps, but also signal more easing in the months ahead. We suspect that the FOMC’s revised “dot plot” included in the Summary of Economic Projections (released simultaneously with the September 18th interest rate announcement) is likely to show a total of 75 bps of easing (previously 25 bps) by year-end.

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

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Alex

The USD/JPY pair fails to capitalize on modest Asian session gains to the 143.00 neighborhood and for now, seems to have stalled its goodish recovery from a nearly nine-month low touched the previous day. Spot prices currently trade around the mid-143.00s, or the lower end of the daily range and seem vulnerable to prolonging the recent well-established downtrend witnessed over the past two months or so.

Despite further signs that consumer prices in the US are easing overall, the core CPI print indicated that the underlying inflation remains sticky and dashed hopes for an outsized, 50 basis points (bps) rate cut by the Federal Reserve (Fed) next week. This, in turn, assists the US Dollar (USD) to regain positive traction and climb back closer to the monthly peak. Apart from this, the risk-on impulse undermined the safe-haven Japanese Yen (JPY) and acted as a tailwind for the USD/JPY pair higher.

The JPY was further weighed down by an unexpected decline in Japan's Producer Price Index (PPI), by 0.2% in August. Adding to this, the yearly rate decelerated more than anticipated to 2.5% during the reported month from 3.0% in July. That said, comments by Bank of Japan (BoJ) board member Naoki Tamura, saying that the path towards ending the easy policy is still very long, reaffirms bets for a further rise in borrowing costs by the end of this year and helps limit losses for the JPY.

Furthermore, the markets have fully priced in a 25 bps Fed rate cut move at its upcoming policy meeting on September 17-18, marking a big divergence in comparison to a hawkish BoJ. This, in turn, prompts fresh selling around the USD/JPY pair and turns out to be a key factor behind the intraday pullback. Traders now look forward to the release of the US PPI for a fresh impetus, though the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside.

Source: FXSTREET

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Cohen

Forex

The AUD/USD pair gains ground following soft Consumer Inflation Expectations from Australia released on Thursday. Additionally, the former Reserve Bank of Australia (RBA) Governor Bernie Fraser criticized the current RBA board for being overly focused on inflation at the expense of the job market. Fraser suggested that the Board should lower the cash rate, warning of "recessionary risks" that could have severe consequences for employment.

The Australian Dollar (AUD) gained support against the US Dollar (USD) as improved risk sentiment followed the release of the US inflation report on Wednesday. The August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low, although core inflation exceeded expectations. This development has heightened the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25-basis points interest rate cut in September.

On Wednesday, Sarah Hunter, the Reserve Bank of Australia's (RBA) Assistant Governor for Economics, remarked that high interest rates are suppressing demand, which is expected to lead to a mild economic downturn. Hunter also pointed out that the labor market remains tight relative to full employment levels, with employment growth projected to continue, though slower than population growth, according to Reuters.

Daily Digest Market Movers: Australian Dollar holds ground due to improved risk sentiment

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.

Australia’s Consumer Inflation Expectations eased to 4.4% in September, down slightly from August's four-month high of 4.5%. This decline highlights the central bank's efforts to strike a balance between bringing inflation down within a reasonable timeframe and maintaining gains in the labor market.

US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index has fallen short of the expected 2.6% reading. Meanwhile, headline CPI stood at 0.2% MoM.

US core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose to 0.3% from previous 0.2% reading.

The first US presidential debate between former President Donald Trump and Democratic nominee Kamala Harris in Pennsylvania was won by Harris, according to a CNN poll. The debate began with a critical focus on the economy, inflation, and economic policies.

Australia's Westpac Consumer Confidence fell by 0.5% month-on-month in September, swinging from a 2.8% gain in August.

Technical Analysis: Australian Dollar moves above 0.6650; next barrier at the nine-day EMA

The AUD/USD pair trades near 0.6680 on Thursday, with technical analysis of the daily chart indicating that it remains within a descending channel, signaling a bearish bias. The 14-day Relative Strength Index (RSI) remains below the 50 level, confirming the ongoing bearish trend.

On the downside, the AUD/USD pair could target the lower boundary of the descending channel around 0.6600. A break below this level may strengthen the bearish outlook, potentially driving the pair toward the throwback support zone near 0.6575.

On the upside, the AUD/USD pair may face resistance around the nine-day Exponential Moving Average (EMA) at 0.6694, followed by the upper boundary of the descending channel near 0.6720. A break above this upper boundary could diminish the bearish bias, potentially opening the door for the pair to retest its seven-month high of 0.6798, last seen on July 11.

AUD/USD: Daily Chart

Source: FXSTREET

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