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Please find the following comment on behalf of Michael Brown, Senior Research Strategist at Pepperstone
(MENAFN- Your Mind media ) The July US CPI report further helps to cement a September Fed cut, though after July's softer-than-expected jobs data, it is the labour market, not inflation, that is likely to determine both the magnitude of such a move, as well as the scale, and speed, of further steps towards normalising policy. Headline prices rose a cooler-than-expected 2.9% YoY, the slowest annual rate of increase since March 2021, while core CPI rose 3.2% YoY, the slowest pace since April of the same year. On an MoM basis, both headline and core prices rose 0.2% MoM, bang in line with expectations, albeit causing a marginally hawkish cross-asset reaction, presumably a result of dovish pre-CPI positioning after the cool PPI figures yesterday.
It seems rather unlikely that the inflation figures will materially alter the policy outlook, though the data does likely help to provide officials with further confidence in the disinflationary process, as price pressures continue to recede back towards the 2% target. A September cut had already been strongly hinted at by Chair Powell in the July press conference, and became an effective certainty after the July jobs report. Though market participants continue to engage in a tug-of-war over whether said cut will be 25bp or 50bp, a more modest 25bp move seems a reasonable first step on the road to normalising policy, with a larger cut likely to smack of panic at this juncture.
That said, with inflation, particularly per the preferred core PCE metric, now within touching distance of target, the speed, and degree, of further cuts looks set to hinge on developments in the labour market. Barring significant, unexpected, further labour market weakness, a total of 50bp of cuts this year – in September, and December – seems the most likely outcome, though an additional 25bp cut in November could well be on the cards if unemployment were to rise further.
Nevertheless, with earnings growth having remained resilient through Q2 reporting season, economic growth still strong, and the flexible 'Fed put' still in place, and as forceful as ever, the path of least resistance should continue to lead to the upside for equities, with dips likely to be bought in relatively short order. In the FX space, meanwhile, with the market continuing to price an overly aggressive 100bp of Fed cuts by year-end, a hawkish repricing of rate expectations should provide some support to the greenback, particularly if policymakers pushback on these expectations, though the same repricing poses downside risks to Treasuries, most notably at the front-end."
It seems rather unlikely that the inflation figures will materially alter the policy outlook, though the data does likely help to provide officials with further confidence in the disinflationary process, as price pressures continue to recede back towards the 2% target. A September cut had already been strongly hinted at by Chair Powell in the July press conference, and became an effective certainty after the July jobs report. Though market participants continue to engage in a tug-of-war over whether said cut will be 25bp or 50bp, a more modest 25bp move seems a reasonable first step on the road to normalising policy, with a larger cut likely to smack of panic at this juncture.
That said, with inflation, particularly per the preferred core PCE metric, now within touching distance of target, the speed, and degree, of further cuts looks set to hinge on developments in the labour market. Barring significant, unexpected, further labour market weakness, a total of 50bp of cuts this year – in September, and December – seems the most likely outcome, though an additional 25bp cut in November could well be on the cards if unemployment were to rise further.
Nevertheless, with earnings growth having remained resilient through Q2 reporting season, economic growth still strong, and the flexible 'Fed put' still in place, and as forceful as ever, the path of least resistance should continue to lead to the upside for equities, with dips likely to be bought in relatively short order. In the FX space, meanwhile, with the market continuing to price an overly aggressive 100bp of Fed cuts by year-end, a hawkish repricing of rate expectations should provide some support to the greenback, particularly if policymakers pushback on these expectations, though the same repricing poses downside risks to Treasuries, most notably at the front-end."
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