US CPI recap: A turning point in the inflation debate?

If the “peak inflation” theme gathers steam in the coming weeks, we may look back at today’s inflation reading as a major turning point for the year-to-date market trends.

Energy 5

In Monday’s CPI preview report, we noted that traders and economists were looking for a decline in headline inflation in July, based heavily on base effects and falling gasoline prices, but the so-called “core” CPI reading (stripping out food and energy prices) was still expected to rise.

As it turns out, the just-released CPI report showed inflation declining at an even faster rate than economists were expecting:

  • Headline CPI printed at 0.0% m/m, 8.5% y/y
  • Core CPI came in at 0.3% m/m, 5.9% y/y

Looking into the individual components, the cooler-than-expected CPI report was driven by sharp declines in energy (-4.6%), gasoline (-7.7%), and used vehicle (-0.4%) prices, whereas the components showing rising prices, like housing / “owners’ equivalent rent” (+0.6%), did not see a meaningful acceleration. Notably, this was the first headline CPI reading that came in below expectation in 11 months!

Market reaction

With so much riding on inflation readings, markets have justifiably seen a big reaction to this morning’s surprisingly soft reading. Crucially, the market-implied odds of a 75bps interest rate hike from the Fed at its next meeting have fallen from nearly 70% before the release to just 25% now, according to the CME’s FedWatch tool. While we still have another NFP and CPI report before the Fed’s next monetary policy meeting, the combination of strong jobs growth and falling inflation that we’ve seen over the last week will certainly have Jerome Powell and company breathing a bit easier.

Not surprisingly, the US dollar has come under strong selling pressure in the wake of the report, with the greenback dropping by roughly 100 pips against all of her major rivals. As the below chart shows, the US dollar index is poised to close below its 50-day exponential moving average for only the second time since February. A close near current levels could set the stage for a deeper pullback toward the 100-day EMA near103.75 next:

FXDXY08102022

Source: StoneX, TradingView

Elsewhere, we’ve seen US equity indices catch a big bid on hopes of less aggressive interest rate hikes, while commodities like gold and oil have rallied on the back of the drop in the world’s reserve currency.

If the “peak inflation” theme gathers steam in the coming weeks, we may look back at today’s inflation reading as a major turning point for the year-to-date market trends.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account