US Inflation Surprises Markets, But Rate Hike Off the Cards?

For the first time since June 2022, the US Consumer Price Index (CPI) inflation increased to 3.2% in July, a figure below analysts’ expectations of 3.3%, reducing the chances of a Federal Reserve interest rate hike in September.

Key Points:

• The US CPI rose for the first time in 13 months, signaling potential economic shifts.
• Though an increase was anticipated, it was less than the consensus forecast, bringing relief to the markets.
• The FedWatch tool by CME Group predicts a 90% probability that the Fed will maintain the current debt cost in September.
• Despite the positive inflation data, the US central bank remains distant from considering rate cuts, as per Mary Daly of San Francisco’s Fed.
• Market indices responded favorably, suggesting investor confidence.

Unraveling the Inflation Numbers

July saw the US CPI rising, marking an awaited shift after remaining stagnant for over a year. This uptick, however, was below the anticipated 3.3%, suggesting that while inflation is present, it isn’t skyrocketing uncontrollably. The core inflation rate, which excludes energy and food costs, decelerated to 4.7%, down from 4.8% the previous month and a significant decrease from 5.9% the previous July.

Market Reaction and Employment Data

This milder inflation growth follows recent data unveiling a cooling US employment market. In July, the US economy generated 187,000 jobs, the lowest since December 2020. The positive reception to this inflation data was evident in the stock market, with indices like the S&P500, NASDAQ, and Dow Jones gaining approximately 0.7% and 0.8% respectively.

Federal Reserve’s Stance

Although investors might be hoping for a looser monetary policy, Mary Daly from the San Francisco Fed provided a reality check. She welcomed the inflation readings but stressed the importance of the “super-core” inflation metric. Daly believes it’s still an issue and should revert to pre-pandemic levels. Most crucially, she mentioned that the central bank is far from even contemplating rate cuts.

The FedWatch tool from CME Group resonates with this sentiment. It showcases a 90% likelihood of no rate hike in the upcoming September meeting. The market, therefore, anticipates a continuation of the current monetary policy, at least in the short term.