After Friday’s softer than expected jobs report, the US updates CPI inflation figures for August on Wednesday. This will be the last major dual mandate reading before the FOMC delivers its policy decision and updated forecasts next Wednesday, September 18. Having digested the NFP data, markets have sided with a 25bps rate cut at that meeting, but there is still over 105bps of policy easing priced into the next three FOMC gatherings. That would imply traders still expect one jumbo-sized 50bps rate cut at one of the meetings before year end.
Fed Chair Powell has recently been quite direct about his inflation assessment. At the Jackson Hole symposium late last month, he mentioned that inflation is now much closer to the Fed’s objective and that “upside risks to inflation have diminished”. As such, the importance of the inflation data has been reduced as policymakers focus on the other side of their mandate – full employment. However, this release still holds significant market-moving ability if we get shock figures.
Interestingly, the recent inflation-related data is mixed. Last week’s prices paid sub-components for both the services and manufacturing ISM surveys managed to produce upside surprises, suggesting renewed strength in price pressures. Similarly, the mid-August University of Michigan consumer sentiment survey had one-year expected inflation at 2.9%.
Expectations for August prices
Consensus looks for US consumer prices to rise +0.2% m/m in August, unchanged from the prior month. while the annual print is forecast at 2.6%, from 2.9% in July. The core rate, which excludes volatile food and energy components, is expected to also increase at a steady pace of +0.2% m/m, with the annual rate at 3.2%.
While details of inflation data are still not entirely consistent with a “normal” pre-pandemic inflation breakdown, various price components broadly should continue to trend more favourably over the coming months. Shelter inflation is forecast to slow in August after some surprising strength in rents in July. Rate setters focus on core services ex shelter inflation which could be a bit stronger in August compared to July. But the upside risk in categories like airfares do not feed into the Fed’s favoured inflation measure, PCE.
Market reaction
A steady report is likely to confirm a 25bps rate cut next week, with US retail sales numbers released the day before the Fed meeting unlikely to move the dial. Speaking after the jobs data, Fed voter Williams said he sees inflation at 2.25% this year versus the Fed’s June forecasts of 2.6%. But that forecast is now judged to be somewhat stale and will be updated next Wednesday when we get the updated economic projections and dot plot. Ultimately, another subdued 0.2% m/m core increase will further highlight that inflation has slowed, with the bigger risk to the Fed mandate now being the labour market. that means an inline report could see modest USD buying as the chances of a 50bps get priced out in the near term.
Note that immediate attention will turn to the upcoming first Presidential debate between VP Harris and former President Trump that will take place at 21.00 Eastern time. This debate has taken on increased importance as Harris only began her presidential campaign about one month ago. The campaign has entered its most intense phase post-Labour Day and markets may become more reactive to polling data as the election grows closer. Neither of the candidates’ policy plans are likely to hint at moves to rein in the ballooning fiscal deficit, and this could be marginally USD-positive. Certainly, the dollar would be expected to appreciate if Trump comes out the victor.