Summary:
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US CPI YY : +2.7% vs +2.8% exp
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Core reading Y/Y: +2.2% vs 2.4% exp
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USD drops back as TNOTE spikes higher
Yesterday’s PPI release coming in below forecasts served as a good predictor for today’s more widely viewed CPI number which also missed to the downside. In year-on-year terms the headline CPI for August came in at 2.7% vs a consensus forecast of 2.8%. This marks a larger than expected drop on the previous month which showed a print of 2.9% and today’s number is in fact the lowest in 4 months.
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The immediate reaction has been a fair size drop in the US dollar, with the buck falling back against all of its crosses barring the JPY and BRL. The biggest gainers are the TRY and ZAR following the larger than expected rate hike from the CBRT earlier. Source: xStation
If volatile aspects of the index such as food and energy are stripped out then a core figure can be arrived at, and this painted a similar picture with a print for August of 2.2% compared to an expected 2.4% - inline with the previous number.
Both the CPI and core reading pulled back last month and while they remain above the 2% threshold for the Fed’s inflation target they do seem to have levelled off in recent months and are no longer clearly trading higher. Source: XTB Macrobond
In terms of what this means for future Fed policy it is highly unlikely to see the bank step back from hiking later this month due to the lower prints, but it does enhance the argument that the future policy doesn’t require a faster pace of tightening to curb inflation. If anything it appears that inflation is drifting back towards target and therefore it allows a bit more wiggle room for the bank.
The initial reaction in the markets has been a clear drop in the US dollar while both US indices and the TNOTE have rallied higher, with the latter indicating a drop in yield on 10-year government debt. The move in the TNOTE is particularly noteworthy given its size with the market typically exhibiting smaller and less volatile moves than FX and equities. The H1 candle is showing the largest range since last Friday’s big drop following the strong NFP number and has engulfed the past 2 days of trade entirely.
There’s been a fairly sharp drop in US yields following the release with the TNOTE, which moves inversely to interest rates, showing a large bullish engulfing candle on H1. Source: xStation
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