U.S. August CPI: Housing Inflation Remains Firm, Dampening 50bp-Cut Expectations

Economic

Data Interpretation

Summary:

U.S. August CPI rose 2.5% YoY, easing for the 5th month, according to data from the U.S. Bureau of Labor Statistics on Wednesday. However, persistent housing inflation led to a slightly higher-than-expected core CPI increase of 0.3%, which suggests that the Federal Reserve might proceed cautiously with rate cuts.

On September 11, ET, the U.S. Bureau of Labor Statistics released the August CPI report.

CPI grew by 0.2% on a monthly basis in August, compared to the expected 0.2% and the previous 0.2%.

CPI grew by 2.5% year-on-year in August, while the expected rate was 2.6% and the previous rate was 2.9%.

Core CPI rose by 0.3% from a month ago in August, compared to the expected 0.2% and the previous 0.2%.

Core CPI rose by 3.2% from a year earlier, while the expected rate was 3.2% and the previous reading was 3.2%.

A 2.5% YoY increase in CPI was sharply lower than the previous 2.9% reading, marking the lowest level since February 2021. The 0.2% monthly growth was in line with expectations and the same as the previous rate. However, the 0.3% monthly growth of core CPI was higher than expected as well as the previous 0.2%, becoming the largest growth in 4 months.

Core CPI ascended unexpectedly in August, mainly due to the accelerated growth of the housing inflation, which grew by 0.5% MoM, the highest growth this year, and by 5.2% YoY. Owners' equivalent rent, or OER, increased by 0.5%, higher than July's reading.

Food prices rose by 0.1% in August, 0.1 percentage point lower than in July. After holding steady in July, the energy price dropped 0.8% MoM in August. In the auto market, used car prices declined by 1.0%, slower than the previous drop of 2.3%. At the same time, the insurance for automobiles rose by 0.6%. The airline fares, after declining for 5 consecutive months, rose by 3.9% in August.

Despite the headline inflation in the U.S. making a solid step toward the Fed's target, core inflation remains sticky due to rising housing prices. Concerns over persistent inflation might prompt the Fed to proceed with rate cuts more cautiously. Following the data release, the market reduced bets on a 50-bps rate cut by the Fed in September. Currently, there's an 85% probability of a 25-bps cut in September, while the chance of a 50-bps cut stands at 15%.

August CPI Report

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ACY

Forex

The British pound has come under renewed pressure against the US dollar, with the GBP/USD pair nearing the critical 1.3000 level. This represents a significant retracement from the late-August highs of around 1.3266, driven by the strengthening US dollar. A key factor in the dollar's resurgence has been the reduced likelihood of a larger, 50 basis point interest rate cut by the Federal Reserve in the near term. However, despite the tempered expectations for immediate aggressive action, markets continue to price in a total of approximately 110 basis points worth of Fed rate cuts by the end of the year and as much as 225 basis points by mid-2024.

GBP/USD Under Pressure as Diverging Central Bank Policies Shape Market Sentiment_1

The growing divergence between the Federal Reserve and the Bank of England (BoE) in terms of their monetary policy trajectories is becoming increasingly pronounced. This divergence is creating uncertainty and volatility within the forex markets, particularly for the GBP/USD pair. The Fed's anticipated pivot to a more accommodative stance has been fuelled by mounting concerns about the health of the US economy. Investors are increasingly expecting a cooling labour market and a further deceleration in inflation, both of which would necessitate a more dovish approach from the Fed.

Fed's Focus Shifts to Labour Market Dynamics

Fed policymakers have been increasingly clear that the state of the labour market will be a critical component in future rate decisions. With inflation showing signs of easing, the Fed now has the flexibility to shift its attention to employment data. Any significant cooling in the job market would likely bolster the case for rate cuts. On the other hand, if labour market data continues to defy expectations, with stronger-than-anticipated job growth or wage inflation, the Fed might be forced to reevaluate the timing and scope of its policy adjustments.

As the US presidential race intensifies, political developments are also playing a larger role in market dynamics. The highly anticipated debate between Vice President Kamala Harris and former President Donald Trump has garnered attention from both political analysts and financial markets. With recent polls indicating a tight race, any unexpected developments during the debate could inject volatility into the currency markets, particularly for the US dollar, as investors recalibrate their expectations based on potential shifts in fiscal policy and economic strategy.

BoE's Cautious Stance Reflects Domestic Challenges

In contrast to the Federal Reserve's increasingly dovish tone, the Bank of England is expected to take a more cautious approach to monetary easing. The market is currently pricing in approximately 50 basis points of BoE rate cuts by the end of the year, with a further 125-150 basis points of cuts anticipated by mid-2024. However, the BoE's next rate cut is unlikely to occur until its November policy meeting, following a contentious decision to begin the rate-cutting cycle earlier in the year.

The UK labour market report presented a somewhat mixed picture, which could have significant implications for the BoE's decision-making process. Employment growth was robust, with an increase of 265,000 jobs over the three months leading up to July, marking the strongest employment gains since May 2022. This uptick in job creation suggests that the UK economy may be recovering more rapidly than expected, adding complexity to the BoE's policy considerations. However, wage growth data revealed a more nuanced story, with regular average weekly earnings increasing at a slower pace of 5.1% in July — the lowest in over a year.

While the deceleration in wage growth aligns with the BoE's goal of containing inflation, median pay rose by 6.2% year-on-year in August, painting a more complicated picture of the labour market's health. This mixed data could lead to further debate within the BoE regarding the timing and scale of future rate cuts. Should the UK economy continue to exhibit resilience, with stronger labour market performance, the BoE may find less urgency to act aggressively, potentially lending support to the pound in the short term.

The current divergence between the Fed and the BoE reflects broader differences in their respective economic landscapes. While the Fed is grappling with a decelerating economy and the possibility of inflation continuing to ease, the BoE is contending with a relatively resilient job market and wage growth that may stoke domestic inflationary pressures. This divergence has created uncertainty around the future trajectory of the GBP/USD pair, as both currencies are being influenced by unique domestic challenges and risks.

In the near term, the performance of the US dollar will likely hinge on economic data and political developments. The Fed's path to rate cuts appears to be set, but any surprises in inflation or employment could spark volatility. Meanwhile, the pound's outlook is tied closely to the BoE's cautious approach and how the UK economy performs relative to market expectations. Should the UK continue to display resilience, the pound may find support, but any signs of economic weakness or political instability could leave the GBP/USD pair vulnerable to further downside.

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FastBull Featured

Daily News

Central Bank

Economic

[Quick Facts]

1. Hamas rejects any new conditions in the Gaza ceasefire deal.

2. Housing inflation remains resilient, dampening 50bp-cut expectations.

3. WSJ's Timiraos says shelter inflation makes bigger rate cut less likely.

4. BOE will not cut rates in Sep. despite weak economic growth.

[News Details]

Hamas rejects any new conditions in the Gaza ceasefire deal

In a statement, Hamas said that it remains positive and flexible in reaching a ceasefire agreement and it is willing to implement the ceasefire based on the Gaza proposal previously presented by the U.S. and related UN Security Council resolutions. Hamas emphasized it would not introduce any new demands during negotiations and rejected any new conditions from other parties. It also stated that the management of Gaza is a matter of internal Palestinian affairs. Hamas welcomed Egypt and Qatar's mediation efforts, supporting their continued role in facilitating the ceasefire.

Housing inflation remains resilient, dampening 50bp-cut expectations

On Wednesday, the U.S. Bureau of Labor Statistics released data showing a 2.5% year-over-year increase in the August CPI, down from 2.9% in July, marking the fifth consecutive month of slowdown. It rose 0.2% from a month ago, in line with expectations. However, persistent housing inflation led to a slightly higher-than-expected core CPI increase of 0.3%, which suggests that the Federal Reserve might proceed cautiously with rate cuts. After the data release, traders reduced their bets on a 50 basis points rate cut in September, with a 25bp cut now having an 85% chance and a 50bp cut just 15%.

WSJ's Timiraos says shelter inflation makes bigger rate cut less likely

Nick Timiraos, chief economics correspondent for The Wall Street Journal (WSJ), noted that a firm shelter inflation reading pushed core inflation higher than expected, lowering the chance of a 50 basis points rate cut at next week's meeting. Officials had hinted at a rate cut, and Wednesday's CPI data would not change that. However, some officials haven't completely ruled out a cut bigger than 25 basis points.

BOE will not cut rates in Sep. despite weak economic growth

Barclays economists Jack Meaning and Abbas Khan pointed out that the U.K.'s weak economic performance in July, where growth remained flat, may catch the attention of Bank of England (BOE) policymakers, possibly reinforcing the belief that initiating an easing cycle in August was the right move and that further cuts will be needed in the coming months. However, they stated that July's lackluster growth won't be enough to force a 25 basis points rate cut at this month's meeting. They added that the third-quarter growth in the U.K. is expected to remain positive, though slower than the first half of the year. Barclays forecasts 0.4% quarterly growth for Q3, in line with the projection of the Bank of England.

[Today's Focus]

UTC+8 20:15 ECB Rate Decision (Sep)

UTC+8 20:30 U.S. PPI (Aug)

UTC+8 20:45 ECB President Lagarde's Monetary Policy Press Conference

To stay updated on all economic events of today, please check out our Economic calendar

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TD Securities

Economic

The Consumer Price Index (CPI) rose 0.2% month-on-month (m/m) in August, bang-on the consensus forecast. On a twelve-month basis, CPI fell to 2.5% (from 2.9% in July).

Energy prices (-0.8% m/m) were a drag on headline inflation, with both energy commodities and energy services lower on month. Food prices remained largely subdued, rising 0.1% m/m and are up 2.1% year-over-year (y/y).

Excluding food and energy, core prices rose 0.3% m/m, following a gain of 0.2% m/m in July. This came in above the consensus forecast, which called for a more modest gain of 0.2% m/m. The twelve-month change on core held steady at 3.2%, while the three-month annualized ticked up to 2.1% (from 1.6% in July).

Price growth on core services rose 0.4% m/m, a slight acceleration from the 0.3% m/m gain recorded the month prior.

Shelter costs unexpectedly rose by 0.5% m/m, higher than the 0.4% m/m gain recorded in July. The uptick was largely driven by a further gain in Owners’ Equivalent Rent (OER), which rose 0.5% m/m, or a tick above the monthly gain averaged over the twelve-months prior – suggesting some mean reversion in the months ahead.

Non-housing services inflation (aka ‘supercore’) also accelerated last month, rising by 0.4% m/m. The gain was largely driven by a further increase in motor vehicle insurance (+0.6% m/m) and travel related costs including airfares (+3.9% m/m) and lodging away from home (+1.8% m/m). However, the three-and-six-month annualized rates of change remain relatively subdued at 1.4% and 2.9%, respectively.

Core goods prices declined by 0.2% on the month, largely due to a further decline in in used vehicle prices (-1.0% m/m), medical & education commodities (-0.4% m/m) and home furnishings (-0.3% m/m). Goods prices have been flat or have registered a decline in each of the last 15 months.

Key Implications

The inflation report was another reminder that there’s going to be bumps in the road in returning inflation back to the Fed’s 2% target. That said, the uptick in core was largely driven by an unexpected gain in shelter costs (mainly related to OER), which is unlikely to persist. Encouragingly, core goods prices remain in deflation, while overall price pressures on non-housing services remain relatively subdued.

In our view, the August readings of employment and inflation have done little to strengthen the case for a larger 50 basis point (bps) rate cut next week. Instead, the Fed is likely to play it cool and cut rates by just 25 bps, but also signal more easing in the months ahead. We suspect that the FOMC’s revised “dot plot” included in the Summary of Economic Projections (released simultaneously with the September 18th interest rate announcement) is likely to show a total of 75 bps of easing (previously 25 bps) by year-end.

To stay updated on all economic events of today, please check out our Economic calendar

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FxPro

Cryptocurrency

Market picture

The cryptocurrency market lost 0.5% in the last 24 hours, falling to $1.99 trillion. As expected, the market failed to consolidate above the $2 trillion level due to the indecisiveness of major players ahead of the US inflation data. Selling has been prevalent since the start of the day, confirming the tactic of quick profit-taking.

Bitcoin is trading around $56.5K, having failed to break through the $58K mark twice since the start of the day on Tuesday. Bitcoin is densely populated by institutional investors, for whom macroeconomics and sentiment in traditional financial markets are the main short-term drivers.

Interestingly, the introduction of ETFs has not yet had a positive impact on momentum. BTCUSD has been in a downtrend since March, while ETHUSD has been actively sold since the end of May. This is more a result of profit-taking by long-term investors after reaching an important milestone in the global adoption of cryptocurrencies rather than a negative effect of the presence of funds and corporates among the buyers. This process will not crash the market, but it has already broken the trend of 4-year cycles of strong growth during bitcoin’s halving years.

News background

According to QCP Capital, implied volatility in bitcoin options remains elevated due to the Trump-Harris debate and US consumer inflation data. Options market participants tend to be predominantly bearish into October.

Since August, USDT volume on cryptocurrency exchanges has been growing rapidly, which could potentially boost cryptocurrency prices, CryptoQuant noted. Previously, from March to July, the dynamics did not show significant fluctuations in turbulence.

According to journalist Colin Wu, total trading volume on the largest centralised exchanges increased by 30% in August. Turnover on the largest cryptocurrency platforms increased by 32%.

SEC recoveries in cryptocurrency-related enforcement actions increased 30-fold to a record $4.7 billion in 2024, largely due to a $4.47 billion settlement with Terraform Labs.

Japan-based Metaplanet announced the purchase of an additional 38,464 BTC ($2 million) at an average price of $54.786. Metaplanet’s reserves approached 400 BTC, with an average coin purchase price of around $66K over the period.

DOGS held the largest Meme Token Issue and Distribution (TGE) in the history of the crypto industry, leading to a surge in activity on the TON network. The DOGS meme token has 4.5 million unique holders.

Total commissions on the Solana network fell to a six-month low due to Pump. fun’s declining popularity.

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ING

Commodity

Energy – Hurricane Francine production impact

ICE Brent rallied back above US$70/bbl yesterday and the front-month contract settled more than 2% higher on the day. As mentioned yesterday, the market was moving into oversold territory and likely would have seen some short covering. Supply risks from Hurricane Francine in the US Gulf of Mexico would also have supported the market and provided another reason for shorts to cover some of their positions. According to the Bureau of Safety and Environmental Enforcement, the hurricane has seen almost 675k b/d oil production shut-in. That is equivalent to 39% of the US Gulf of Mexico's output.

The EIA’s latest weekly storage report was fairly bearish. US commercial crude oil inventories increased by 833k barrels over the week, and there were also builds in refined products. Gasoline and distillate stocks increased by 2.31m barrels each. Implied gasoline demand also fell by 460k b/d WoW to 8.48m b/d, which is the weakest level since April, and not too surprising as we move towards the end of the driving season.

European natural gas prices rallied yesterday following recent weakness. TTF settled more than 2.4% higher on the day. Hurricane Francine will have raised concerns over LNG export capacity along the US Gulf Coast. Closer to Europe, a 5-day extension to maintenance work at the Kollsnes processing plant in Norway would have provided some support, and there was also nervousness around Russian gas flows through Ukraine. Preliminary nomination data showed that flows would fall from the usual 42mcm/day to just under 30mcm/day on Thursday. However, the latest nomination data should ease these concerns, as it now shows that gas flows should be in a normal range on Thursday, at a little over 42mcm/day.

The IEA will release its latest monthly oil market report later today. The market will be keen to see what the agency’s latest views are on demand as well as the outlook for 2025. The EIA will also release its weekly US natural gas storage report today and expectations are that natural gas inventories increased by around 48Bcf over the last week.

Metals – Russian nickel risk

LME nickel rallied almost 2.4% yesterday, taking it back above US$16,000/t after reports that President Putin asked his government to look into potential export caps on several commodities, including nickel. Any action would be a retaliatory move for Western sanctions against Russia. Russia exported in the region of 100kt of nickel last year, which is roughly equivalent to the global surplus forecast in the market this year.

Agriculture – WASDE release

The USDA is scheduled to release its monthly WASDE report later today. The market expects the agency to increase its US soybean ending stocks by roughly 8m bushels to 568m bushels while trimming its corn ending stock estimates by 40m bushels to 2,033m bushels. Little change is expected in global ending stocks for both corn and soybeans.

Brazil’s total coffee exports rose 0.7% YoY to 3.7m bags (60kg) in August, according to data released by Cecafe Group. The group said that the Arabica coffee exports fell 6.6% YoY to 2.5m bags. In contrast, Robusta coffee exports rose 31.4% YoY to 924.7k bags.

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Glendon

Economic

The Mexican Peso (MXN) has been navigating through a volatile 2024, reflecting a mix of both domestic and global economic developments. A key driver of the peso’s movements has been its close relationship with U.S. economic data, monetary policy decisions, and risk sentiment in global markets.

Current Exchange Rate Trends

As of September 2024, USD/MXN is trading near 17.30, reflecting a resilient peso despite headwinds in the broader global economy. The pair has faced resistance near 17.40 and support near 17.00, showcasing a tight consolidation range in recent weeks. This technical setup indicates a possible breakout scenario as markets await key economic data.

Key Technical Indicators

Resistance Levels:

The primary resistance for USD/MXN stands at 17.40, a level that has been tested multiple times throughout August and early September. A breach above this level could open the door for further upward momentum, with the next significant resistance at 17.60.

Support Levels:

Strong support lies near 17.00, a psychological level for the peso. A break below this could prompt further selling pressure, with potential downside targets near 16.80. Another critical support level to watch is the 200-day Moving Average (MA), which is hovering around 16.85. If USD/MXN fails to stay above this MA, it could signal a longer-term bearish trend for the peso.

Moving Averages:

The 50-day Moving Average is positioned at 17.25, just below the current market price, providing near-term support. The 200-day MA remains a crucial long-term indicator for investors, with MXN maintaining strength above this line, signaling a relatively bullish outlook for the peso in the medium term.

Relative Strength Index (RSI):

The RSI is hovering around 52, indicating a neutral market condition. A move above 70 would suggest the peso is becoming overbought, while a dip below 30 would indicate oversold conditions and potential buying opportunities.

News Impacting the Peso

U.S. Federal Reserve Decisions: The recent CPI report for August showed that inflation in the U.S. remains sticky, although there is growing speculation that the Federal Reserve may soon begin its rate-cutting cycle. Markets are pricing in a 25-basis-point rate cut in September 2024, which could affect the USD/MXN pair. A rate cut would typically weaken the dollar, potentially benefiting the Mexican Peso.

Domestic Inflation Data: On the domestic front, Mexico’s inflation remains a focal point. Recent data showed inflation softening to 4.64% in August, down from the 4.79% recorded in July. The slowing inflation suggests that Banxico (Bank of Mexico) may hold off on further interest rate hikes. However, the peso remains sensitive to Banxico’s monetary policy moves, as tighter monetary conditions would likely bolster the currency.

Emerging Market Sentiment: In broader emerging markets, Mexico has benefited from a renewed appetite for risk assets. Positive growth forecasts for the country’s manufacturing and export sectors, particularly due to its close trade ties with the U.S., have helped the peso. However, emerging market currencies, including the peso, are prone to sell-offs during periods of global risk aversion, especially if U.S. Treasury yields continue to rise.

U.S.-Mexico Trade Relations: Mexico remains heavily reliant on its trade relationship with the U.S. Any disruptions in trade agreements or political friction could negatively impact the peso. However, recent developments, including new bilateral agreements on energy cooperation and investment, have helped maintain positive sentiment toward the peso.

Outlook for the Mexican Peso (MXN)

The outlook for the Mexican peso will largely depend on upcoming economic data from both Mexico and the U.S. Investors are keenly awaiting the release of the U.S. Producer Price Index (PPI) and other inflation metrics, which could provide further clues regarding Federal Reserve policy.

If the Federal Reserve begins cutting rates as expected, this could lead to dollar weakness and peso strength, potentially pushing USD/MXN below the 17.00 level. Conversely, if inflation remains stubborn and the Fed delays easing, the peso may face increased pressure from a strengthening U.S. dollar and rising bond yields.

Short-Term Forecast for USD/MXN

Given the current technical setup and the broader economic backdrop, the Mexican peso is likely to remain within the 17.00-17.40 range in the short term. However, a breakout could occur, driven by U.S. inflation data or Fed rate decisions. Traders should watch for a breach of 17.40, which could pave the way for further upside in USD/MXN, while a move below 17.00 would indicate potential further strength in the peso.

Conclusion

The Mexican peso has shown remarkable resilience in 2024, despite ongoing global challenges. Its performance will remain tied to developments in the U.S. economy, Banxico’s policy stance, and global risk sentiment. For investors, the 17.00 and 17.40 levels will be crucial in determining the next directional move for USD/MXN, with support from technical indicators suggesting the peso could see strength in the months ahead if the global and domestic environments remain favorable.

To stay updated on all economic events of today, please check out our Economic calendar

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