Softer-than-feared US inflation despite robust spending
At a Glance
The desk interprets the recent US inflation data as a noteworthy pivot point that dampens immediate rate hike expectations, supporting the view held by NY Fed President John Williams that further tightening is not urgent. Recent figures show the core PCE deflator at 0.2% month-on-month for August, below forecasts of 0.3%, which along with downward revisions to the previous month, indicates a more favorable outlook on inflation trends. Per the full note , this data shift could temporarily ease pressure on the Fed to act, with markets pricing in only 9 basis points for the upcoming October FOMC meeting compared to 18 basis points prior to the report.
Key Takeaways
- 01US inflation softer than expected, reducing immediate rate hike pressure.
- 02Core PCE deflator at 0.2% MoM, supporting balanced economic outlook.
- 03Market now pricing only 9 basis points for October FOMC rate change.
Full Analysis
What the desk is arguing
The desk believes that the softer US inflation numbers may lead to a pause in the Fed's tightening cycle in the near term. Per the full note , inflation undershooting expectations not only creates a more balanced economic outlook but also supports comments from Fed officials regarding the need for caution.
Specifically, the core PCE deflator showed a month-on-month increase of just 0.2%, while the annual rate clocked in at 3%, significantly lower than the consensus of 3.3%. This trend is important as it suggests that inflation might be trending towards the Fed's target of 2%, as evidenced by the recent 3-month annualized rate also landing at 2%.
Where it sits in our coverage
Our current consensus target for USD/EUR is 1.075, within a range of 1.04 to 1.12. Notable firm forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This interpretation appears to align closely with the projections set by jpmorgan and diverges from the bearish stance of bofa, suggesting our position is at the higher end of the spectrum as markets digest the latest inflation data.
How other firms see it
jpmorgan and credit suisse share an aligned view, anticipating that inflation trends may prompt a slower pace of Fed tightening. Conversely, firms like bofa express a more cautious outlook, expecting continued pressure for rate hikes.
Traders should also keep an eye on the EUR/USD trajectory, especially in light of recent comments from ECB officials, which could further impact market sentiment regarding dollar strength or weakness.
Market Implications
Watch for any shifts in October FOMC expectations as data evolves. A key level to monitor is the 0.2% threshold on the core PCE, which could influence future Fed communications. Positioning in the USD will likely respond to any further downward surprises in inflation.
From the original
Older quick take Quick take Published 14:16 United States Softer-than-feared US inflation despite robust spending Cooler-than-feared inflation supports the NY Fed President John Williams' assertion that there is no immediate rush to hike rates again, even though more tightening w
Related speeches
4 itemsUS spending stalls as inflation makes slow progress towards target
The desk interprets recent economic data indicating that U.S. consumer spending is stalling, while inflation still progresses slowly towards the Federal Reserve's target. Per the full note, the July core PCE deflator remained consistent at 0.2% MoM and 3.3% YoY, reflecting a stable, albeit sluggish, inflation trajectory. Notably, while the market anticipates a potential rate hike later this year, many economists argue for a prolonged pause in rate adjustments, underscoring the mixed consumer fundamentals and flat-lined real incomes. This divergence could shape FX strategies as traders assess the likelihood of Fed action amidst a complicated economic backdrop.
Cooling US inflation points to the Fed holding steady
The desk believes that recent cooling in US inflation, particularly following a disappointing July jobs report, will likely lead to the Federal Reserve maintaining its current interest rate policy for an extended period. Per the full note [source], July saw core inflation decline to an annualized rate of 2.5%, with 3M annualized core inflation dipping even lower to 1.6%. This shift reduces the urgency for hawkish moves from the Fed, especially as market participants brace for upcoming data releases and the Jackson Hole symposium later this month.