Yesterday’s US CPI report was mixed, worse-than-expected and far from soothing. The headline inflation ticked from 3.2% to 3.7%, higher than the 3.6% expected by analysts, and core inflation came in at 4.3%, in line with expectations. But on a monthly basis, both headline and core inflation numbers were slightly higher than expected. The spike in energy prices was to blame for the rise in the headline figure. In fact, gasoline prices rose by more than 11% in August, and that accounted for more than half of the overall monthly rise in inflation. The only good news was that core inflation in the past three months ran at a 2.4% annual rate, the lowest since March 2021, and just at a spitting distance from the Federal Reserve’s (Fed) 2% inflation target. That’s maybe why the market reaction to a higher-than-expected set of monthly and yearly CPI metrics didn’t see a bad market reaction? The US 2-year yield was shortly above the 5% level yesterday but fell after the data, activity on Fed funds futures now gives 97% chance for a pause at next week’s FOMC meeting, but the probability of a pause in November is slightly less than before the data, at 56%. In summary, yesterday’s CPI data tilted the expectation for a November hike slightly higher, without however changing the consensus of a no rate hike for the moment.
ECB expectations tilt toward rate hike
Not earlier than the beginning of this week, the expectation for today’s European Central Bank (ECB) meeting was a no rate hike. Today, just a few hours before the meeting, the pricing is pointing at a 25bp hike as the most likely scenario; money markets are pricing in a 68% chance for a 25bp hike.
But the data remains morose. Released yesterday, the euro area industrial production figures were looking rather bad, with a more than 1% slump on a monthly basis, and a 2% slump on a yearly basis. That’s also why the higher ECB rate hike expectations couldn’t really boost appetite in the EURUSD, the pair sees resistance at the 1.0765/1.070 range. If the ECB raises the rates today, the EURUSD could make a move toward the 200-DMA, 1.0825, and the Stoxx 600 could slip below the 445, a double bottom.
While there is a decent downside potential in European stocks, the upside potential in the EURUSD is limited by the weakness of the economic data. In fact, the gap between the US and German 10-year yield has been narrowing since about 3 weeks, but the EURUSD barely benefited from it, on the contrary, the EURUSD weakened more than 1% during the same period. Apparently, the morose economic outlook brings investors to think that, even if the ECB hikes today, it will certainly be the last one, and that in less than a year from now, we will be talking about the first rate cut in Europe due to economic weakness.
Across the Channel, the picture is not sunnier, obviously. The latest data revealed that the British economy shrank at the fastest speed in seven months in July. Strikes and the lack of sun were responsible for the gloomy data. You would think that slower economy could at least mean a softer UK inflation – a silver lining?. But no. Because data released earlier this week showed that the UJ unemployment rose, yet wages grew at a record high, the record starting from 2001. The Brits earned 8.5% more on the year, which is good news for their struggle to keep up with the cost of living crisis, but clearly bad news for the Bank of England (BoE), which is trying so hard to abate inflation, but in vain. They abate economic growth instead. Cable is testing the 200-DMA to the downside this week, for similar reasons to the euro. BoE rate hike expectations are strongly here, but growth outlook looks so gloomy that not many traders are willing to try a long sterling position.
Now, for all central bankers, those who want to raise rates and those who don’t want, the headache is the same. Oil prices are rising, and that’s muddying the future inflation expectations. The US is in a better position than the rest of world because, at least, they don’t have to worry about currency depreciation to make things worse. But the barrel of US crude came close to the $90pb level yesterday. Happily, the latest EIA data showed a 4-mio build in the US inventories last week, which certainly helped not boost the bull’s run further. US crude is now at the overbought market territory. The $90pb level is a psychological resistance and global economic data hints at slow activity ahead of us. The mix calls for at least a minor correction at the current levels.
In equities, all eyes are on ARM that will go public today. The company set its IPO price to $51 a share. It’s at the top end of the proposed price range, but still lower than the valuation of $64bn when Softbank bought out a stake from Vision Fund.
 meeting was a no rate hike. Today, just a few hours before the meeting, the pricing is pointing at a 25bp hike as the most likely scenario; money markets are pricing in a 68% chance for a 25bp hike.){kind=link}