The news gave markets a welcome boost

Finally, markets get something to smile about on inflation. There was a collective sigh of relief yesterday afternoon, as the latest U.S inflation report showed some promising signs of easing. The headline (YoY) print dropped from 9.1% to 8.5%, and 0.3% (MoM) from 0.7% previously. Lower gas prices were a key driver to the weaker headline. The ‘Core’ (ex food and energy) component also dropped to a 0.3% gain through July, down from 0.7% previously. The annual increase was flat at 5.9%. The Fed pay particular attention to the Core reading, a fact that was not lost on markets.

What does it mean for the Fed?

Whilst it was refreshing to see some signs of softening U.S inflation, as we have highlighted before, the Fed are highly unlikely to be moved by a single data set. However, there will be another Inflation report (August) released ahead of he next FOMC meeting (in September), so if there is a trend of softening price pressures emerging, this could be a boost to those who feel that the Fed are likely to slow down rate hikes ahead. Indeed, markets were quick to reprice future rate hike expectations immediately after the CPI report, which will likely continue to see-saw between either a 50bps or 75bps hike come September.

What did the markets do?

As we said at the top, markets were buoyed by the report, with risk assets surging as the headlines broke, and maintaining gains throughout the day. The interest-rate sensitive Nasdaq rallied over 2.5% (at one point), with strong gains quickly following amongst the key equity indexes and cryptocurrencies, as well as yields falling on bonds.

Dollar suffers heavy losses

In the currency mix, the moves played-out as we suggested might be the case on a weaker print, with the dollar suffering heavy losses across the board. The dollar index (DXY) slipped below 104.50 for the first time since the end of June, highlighting those broad-based dollar losses. EUR/USD surged to a one-month high of 1.0370, and moving over 1% higher on the session. GBP/USD fared even better, rallying to a top of 1.2272 on the day, marking 1.5% gains. Elsewhere, it was a similar story with currencies clawing back some of the recent losses against the greenback, as USD/CAD slipped under 1.2755, and USD/JPY moving back down to 132.50. USD/CHF also recorded its biggest daily fall since the middle of June, slipping to under 0.9400.

Producer Prices up next

After that softening CPI report yesterday, attention will turn to focus on U.S Producer Prices, which are released later today. Much like CPI, markets expect a drop from around 11.3% (YoY) to 10.3%, with the ‘Core’ reading expected to decline to around 7.6% (YoY) from 8.2% previously. Last month, there was a larger than expected increase in PPI, but underlying producer inflation looks to have peaked. Here’s hoping. For an overview of last month’s PPI report, please click here.

What else is happening today?

Whilst the latest UK growth report is not technically released until tomorrow (Friday) morning, the report will be released ahead of our weekly publication, as it is released at around 6AM GMT. After the surprise increase (of 0.5%) last month, this month is expected to show a decline of around 1.3%. Given that the stronger growth figures were key in helping to convince the BoE that a larger hike was warranted this month, it will be fascinating to see what happens tomorrow. We should perhaps also expect the pound to be highly sensitive to the report.

USD – Consumer Price index Core, Continuing Jobless Claims, Initial Jobless Claims, Producer price Index/ex Food and Energy

NZD – Business NZ, Food Price Index

JPY – Foreign Bond Investment, Foreign Investment in Japan Stocks