Download this week’s full edition!
July’s soft inflation data—0.1% headline and 0.2% core CPI—has boosted the odds of a September Fed pause to 70% and encouraged investors to unwind near-term rate-hike bets, though markets still brace for modestly tighter policy ahead amid uncertainty over Middle East energy disruptions.
What caught our eyes this week
Encouraging trends in inflation
If the Federal Reserve was looking for some breathing room to avoid hiking rates in September, it likely got it in the inflation data last week. Headline consumer prices were up just 0.1% in July, while the core Consumer Price Index (CPI), which ignores the recent volatility in energy prices, was also up an acceptable 0.2%. Outside of the unknown near-term future for oil markets, the outlook for inflation elsewhere (e.g., core goods and shelter) looks encouraging. Accordingly, investors are continuing to unwind bets for near-term rate hikes. In federal funds futures markets, odds for another pause in the September Federal Open Market Committee meeting have reached 70%, up from 44% just a week ago. Though with roughly one rate hike still priced in by the end of the year and the two-year Treasury yield well above the current policy rate at 4.17%, markets are clearly braced for tighter policy in the intermediate future. The wide range of outcomes in the Middle East rules out any certainty about the path for headline inflation, but if we can find a way out of the ongoing energy supply disruption, underlying inflation trends look promising.
CHART OF THE WEEK: Cerity Partners, FRED
Past performance does not guarantee future results.
Please read important disclosures here.
