The US July CPI data was a pleasing result for not only financial markets but also for the Fed, with the numbers demonstrating that the disinflation process continues in the US economy.
The current rate of disinflation seems congruent with the scenario of a September pause from the FOMC, though markets will probably remain a little anxious knowing that the August CPI print is still to come between now and the next policy meeting.
So, it’s perhaps a bit too early to start counting the chickens yet, particularly because if the past 18 months have taught us anything it is that inflation has proven to be a difficult beast to tame.
With one key inflation gauge now in the books, PPI is due up next and traders who are long risk-assets will be hoping that there are no nasty surprises regarding the producer prices data from July. It will be interesting to watch how treasury yields and the USD react to this next inflation number given what we saw in the wake of the CPI print.
After an initial slump on the softer CPI, the DXY reversed course and followed treasury yields higher which to me indicates that a rate cut from the FOMC is not yet on the horizon as far as these two assets are concerned. It will ultimately come down to whether the current rate of disinflation slows or stalls over the next six months.
The outcome of this will be critical in dictating whether the next policy move from the Fed is one of tightening or one of loosening.
US dollar bounces back
The bounce back in the USD meant that gains from the likes of the euro, sterling and AUD were short-lived. During Asian trading hours, the Aussie Dollar did tick fractionally higher on some hawkish comments from the RBA Governor Philip Lowe. During testimony before the House Economics Committee, Lowe gave a reminder that interest rates may need to be tightened further, which prompted a mild upside move in the AUD, however underlying greenback strength limited the moves.
Gold price lower
The gold price is pinned lower due to rising US treasury yields and USD appreciation. Any further persistence in greenback strength could see long term support at the $1900 level tested.
Oil price eases
Meanwhile, the oil price eased from the highs after the WTI contract touched the US$84 level. Over the past few weeks, oil company execs as well as OPEC+ have been painting a rosy looking outlook for oil demand, which has been acting as a counterbalance to the negative Chinese data this week. The pace of gains from July have slowed down with oil now entering a consolidation phase with momentum showing signs of waning.
Overall, it’s a quiet day on Asian equity markets with Tokyo closed and traders awaiting the US PPI data for the next directional cues.
Market commentary from Tim Waterer, chief market analyst at KCM Trade
