US CPI Comes In Below Forecasts At 8.5%.

US CPI Comes in at 8.5%.

Yesterday the dollar came under pressure as markets reacted to US CPI coming in at 8.5% which was 0.2 percentage points below expectations. Money markets subsequently altered their expectations on the prospect of a 75bpt rate hike when the FOMC next convene on 21st??September as they now forecast just a 43% chance of a 0.75% hike – a sizable drop from previous estimations before the print.

The month-on-month fall in the price of gasoline (at 7.7%) influenced the fall in headline inflation, which was the largest monthly decline since April 2020, as did the 7.6% slide in the price of energy related commodities. Airline fares also fell 7.8% on a monthly basis, as used cars, communication and clothing all experienced falls. This comes as oil prices have seen two consecutive months of decline as WTI crude futures are trading at around $92dpb which represents a -1.30% fall from a month ago.

Nevertheless, as expectations over the extent of monetary tightening eased, the price of oil surged from some $88dpb to highs of $92dpb as investors weighed on the implications of higher demand for oil.

While yesterday’s 8.5% print represented a slowdown from last month’s figure of 9.1% which was the highest that headline inflation had been in 40-year, core inflation remained unchanged at 5.9%. While this was similarly 0.2 percentage points below market expectations, the fact that headline inflation had reduced from last month’s print while core inflation had remained unchanged illustrates the prevalence of inflationary pressures throughout the US economy. Indeed, the shelter index has risen some 5.7% over the last year, which accounts for around 40 % of the total increase in the core index. Subsequently, the Fed’s Daly said that it is “too early to declare victory over inflation” and that a 75bpt rate hike can still not be ruled out. Hence, all eyes will now look towards next month’s print on 10th?September which comes just 11 days before the FOMC’s rate hike decision.

Equities

Following yesterday’s print and considerations that the Fed may conduct a less aggressive rate hike on the 21st?September saw equities surge. As such, the S&P 500 surged 500pts yesterday representing an increase of 1.63%. The tech heavy Nasdaq also rose 2.98% over the course of the session which represented its highest close since April.???

Elsewhere the FTSE 100 finished the day 0.2% up, while the French CAC index rose 0.7% and the Dax rose 1.2%.

Droughts Exacerbate Energy Insecurity

Droughts around the Rhine’s catchment area have meant that barges will be unable to use much of the river as early as tomorrow. Water levels are predicted to fall to as low as 37cm by the weekend and the disruption caused to cargo will be significant given that it used by numerous coal, oil and gas companies to transport goods. Indeed, the average barge has the same capacity as more than 100 lorries.

The lack of water – and heat of the water within the rivers –?has also caused EDF to reduce output at some of their nuclear power facilities given that sufficient cooling cannot be administered.

As discussed earlier this week, the Norwegian government are also devising plans to ration electricity exports to the UK and Europe as the unusually warm and dry weather has damaged their hydro-electric power generation. In southern Norway, water levels are at just 49.3% (their lowest since 1996) against a seasonal average of 74.4% according to the Norwegian Water Resources and Energy Directorate. Norway is one of the largest exporters of electricity to the continent and is critical to the supply of UK energy, hence all eyes will be on Oslo’s next move…along with its weather forecast.?

Looking Ahead

Today will see the markets focus in on US PPI data which is forecast to come in at 10.4% - which would represent a slight decrease from last month’s print of 11.3%. Considerations will also turn to initial jobless claims data this afternoon, particularly given last week’s nonfarm payrolls coming greatly above expectation. Then tomorrow morning all eyes will be focused on the release of Q2 GDP figures from the UK which is expected to see a print of a 0.2% contraction.