Mixed Signals as Fed Faces Crucial Decision
The US CPI report released yesterday, the final one before next week’s FOMC meeting, has given markets plenty to consider. Both headline and core CPI matched expectations year-over-year at 2.5% and 3.2%, respectively. However, the slight uptick in August’s core CPI, combined with stronger real average earnings—hourly earnings up 1.3%YoY (previously 0.7%) and weekly earnings up 0.9%YoY (from 0.4%)—has tempered market expectations for a rate cut, reducing it to 25 bps. Despite this, futures markets still anticipate four rate cuts this year.
Prior to the CPI release, the 2-year US Treasury yield hit its lowest level since September 2022, while the 30-year yield also reached year-ago levels. However, yields rose across the curve, especially at the short end, as rising housing costs and airline fares drove core inflation marginally higher in August.
Interestingly, the 10-year breakeven rate fell to its lowest level since 2021 ahead of the release, but edged up to 2.06% post-report, signalling that markets expect inflation to fall short of the Fed's 2% target over the decade. Historically, CPI has run about 40bps above the Fed's preferred PCE Price Index. While high inflation is damaging, persistently low inflation poses its own risks, potentially limiting the Fed’s ability to address future downturns and shifting focus to employment, one side of the Fed’s dual mandate that has raised concerns.
Earlier, the New York Fed’s latest Survey of Consumer Expectations reported stable inflation forecasts for both one-year and five-year horizons, while the three-year outlook ticked up slightly to 2.5%. The survey revealed mixed views on the labour market, with expectations of higher wages and income, alongside rising consumer spending forecasts. It also showed improved credit access but noted growing concerns over missed debt payments for a third consecutive month.
In summary, policymakers face a mixed outlook, with today's PPI data potentially offering more clarity, especially as certain components influence the Fed’s favoured PCE deflator, due after the FOMC meeting. Ahead of next week’s meeting, key data includes retail sales, with Bloomberg surveys predicting the control group to remain steady at 0.3% for August, while the advance reading is expected to dip from 1.0%MoM to 0.2%.
As always, volatility can create opportunities. We stand at the ready.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.