After the release of August CPI data this morning, the United States Dollar swung wildly but ultimately settled ever so slightly higher than opening prices as monthly inflation came in dead on expectations at 0.6%.
This rise from July’s full reading rate is likely driven primarily by energy prices as flooding in Libya and production cuts from OPEC continue to raise oil prices, and US consumers can feel this when they hit the pump for gas. This jump was largely expected, however, and even the slight uptick in annualized inflation is not moving the needle for USD.
The only mild surprise came from the ‘core’ reading, excluding food and energy prices, swinging up 0.3% in August versus 0.2% expected. This increase was driven at least in part by housing and household services, remaining stubbornly high – another sign that, ironically enough, the Fed is unlikely to hike interest rates next week. Demand for housing functionally cannot really decrease, and it’s clear that high interest rates are beginning to take their toll on the average American. A further rate hike from the Fed likely would not bring this down at all and may, in fact, have the opposite effect of continuing to increase shelter prices.
All in all, this morning’s reading served only to reinforce the Fed’s data-driven approach and its path through the end of the year. If there is to be another 25 basis point interest rate hike this year, it is most likely to come in November, as the odds of a hike then increased marginally this morning. Rate cuts are not expected through the first half of 2024, contrasting a bit with expectations for other central banks. The European Central Bank is expected to raise interest rates tomorrow morning but is likely to institute easing before the Fed.
It’s important to note that while the fundaments of the larger US economy do continue to show strength, there are underlying seeds that show the average consumer to be increasingly at risk. Credit card debt continues to balloon, mortgage demand is at a 27-year low, and slowing inflation does not mean deflation or functionally lower prices. The US may avoid a technical recession, but it is far from roses domestically.
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Japanese Yen continued to falter this morning, losing a third of a percent against the United States Dollar. While Kazuo Ueda’s words over the weekend were enough to temporarily boost the Yen close to a percent, just the threat of a policy change from the Bank of Japan does not appear to be enough to substantially change JPY’s future. It’s clear the BoJ is paying attention to currency weakness, and it’s also becoming clear that ‘jawboning’ is not an adequate response, raising the likelihood of real intervention in the coming months.
Pound Sterling took a hit early this morning after GDP in the UK showed the economy shrank at 0.5% in the month of July, well below both expectations of -0.2% and June’s growth figure of 0.5%.P The current best-case for the UK economy over the next year is stagnation, so today’s release is bad news for the Bank of England and the larger government. Hit with extraordinarily high borrowing prices, consumers are dialing back spending and the UK inches ever closer to a technical recession.