US CPI inflation slowing, FED 75bps hike less likely, risk assets jump

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Central banks have fully reversed since late last year after being extremely accommodative with their monetary policies in the time of coronavirus. They have raised interest rates frantically, led by the Fed, which has made two rate hikes worth 0.75% in the last two meetings.

This has kept the USD up and risk assets down, especially stock markets which have been trending lower since the start of this year. Although in recent weeks we have seen them rise, they may have already bottomed out. Central banks attributed this rapid monetary tightening to rising inflation, but rate hikes haven’t helped much and they won’t.

Although central banks are hinting at a slowdown with rate hikes as the global economy heads into a recession. If inflation also slows, it will be an added bonus for central banks to justify the slowdown with increases. Thus, risk sentiment became very sensitive to CPI (Consumer Price Index) inflation figures and yesterday’s failure in July expectations sent risk assets higher.

Consumer price index inflation in the United States in July 2022

  • US July CPI YoY +8.5% vs +8.7% expected
  • June year-on-year CPI was 8.3%
  • July CPI MoM 0.0% vs +0.2% expected
  • June CPI was +1.3%

Basic CPI measures:

  • July Core CPI YoY 5.9% vs. 6.1% expected
  • June core CPI year-on-year was 5.9%
  • July CPI MoM +0.3% vs. +0.5% expected
  • June MoM core CPI was +0.7%

Details:

  • Energy CPI July -4.6% vs. +7.5% before
  • Gasoline -7.7% vs. +11.2% before
  • New vehicles +0.6% vs +0.7% before
  • Used vehicles -0.4% vs. +1.6% m/m before
  • Owner equivalent rent +0.6% m/m vs +0.6% before
  • Food +1.1% vs +1.0% before
  • Actual weekly earnings MoM +0.5% vs -1.0% before

The American dollars fell hard on these headlines as stock futures soar. USD/JPY fell 300 pips to 132 with S&P 500 futures up around 85 points. This is the green light that some equity bulls have been looking for. The implied probability of a 75 basis point hike in September is down to 31% from 68% yesterday.

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