Week Ahead: Will US CPI cement another jumbo-sized September rate hike?

Updated August 8, 2022

Friday’s closely watched US jobs report gave a shot in the arm to dollar bulls and those screaming “recession”! It showed employers added 528,000 jobs, more than double the 250,000 expected by economists, and up sharply from the revised 398,000 in June. Unemployment ticked down to its multi-decade low and there was a renewed pick-up in wage pressure.

Markets are now predicting US rates hit 3.6% in February next year, up from 3.4% prior to the data release. The rate range currently stands at 2.25% to 2.5%. The next FOMC meeting in September has now swung in favour of a jumbo 75 basis point rate hike with Fed funds futures pricing in a 60% chance of a third big rate rise, from 40% before the data release.

Of course, there is still seven weeks until the next meeting, and another non-farm payroll release to come. But the red-hot labour market doesn’t seem to be cooling any time soon – payrolls over the last three months have averaged 473,000. These kind of job gains do not happen in a recession.

The Fed will be hoping we can avoid another leg higher in this week’s inflation numbers, the like of which we saw in the previous data. Certainly, the drop in gasoline prices should provide some relief but the core readings will still be elevated around 6% on an annual basis. That is a long way back to the Fed’s target of 2% and in this environment, the dollar should continue to find more buyers.

The DXY looks to bouncing off trendline support and the 50-day SMA once again. That said, the euro still can’t break out of its range, no matter what is slung at the single currency. Perhaps US 10-year yields getting nearer to 3% will do the job.

Major risk events of the week

08 August 2022, Monday:

-Eurozone Sentix Confidence Survey: Rising prices are impacting consumer activity and investor confidence. The previous data worsened to -26.4 from -15.8 in June. The index had recovered from its lowest level since June 2020 as supply chain concerns eased.

10 August 2022, Wednesday:

China CPI: China inflation is expected to buck the regional trend and rise gently. ING sees the headline figure increasing to 2.7% from 2.5% in June. PPI inflation is seen slowing to 5% y/y from 6% in July. Raw material prices fell on slower real estate construction activity.

-US CPI: Consensus forecasts the headline print at 0.2% m/m and 8.8% y/y, falling from the prior 1.3% and 9.1%. Analysts say the sharp drop in gasoline prices will offer some relief. The core is also expected to tick down though housing costs will remain elevated.

12 August 2022, Friday:

-UK Q2 GDP Consensus forecast at least a 1% fall in activity in June, largely due to the extra bank holiday for the Jubilee. This implies negative quarterly growth during Q2. Analysts sees a small rebound in the following quarter before consecutive falls in Q4 and Q1 next year.

Michigan Consumer Sentiment: Falling gasoline prices should offer some support to households after the index sank on tumbling equity markets and the cost-of-living crisis. This survey has gained prominence after the June data was cited as a factor in Fed officials’ decision to lift rates by 75bp rather than by just a half point.

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