Following the surprisingly weak jobs report last Friday, all eyes are on the Consumer Price Index (CPI) release on Wednesday. In July, jobs in the United States declined by 23,000 when forecasts had anticipated 83,000, and June numbers were significantly revised down by 12,000. Friday's numbers gave the Federal Reserve a break, but inflation will make or break the case for a September rate hike.
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What to expect
The July CPI report is due out on Wednesday, August 12 at 8:30 am EST (12:30 pm GMT). Cleveland Fed estimates that the headline CPI will be at 3.45% on an annual basis and core CPI will be at 2.43%.
Metric | Prior (June) | Forecast (July)
--- | --- | ---
CPI (annual %) | 3.5% | 3.4-3.5%
Core CPI (annual %) | 2.6% | 2.4-2.5%
The core CPI is the most important reading, as it excludes the fluctuating prices of food and energy and is a closely watched figure by the Fed. Core CPI in June came down from 2.9% to 2.6%, below forecasts that the decline would be only 0.2%, bringing down market expectations even further. Forecasts are clustered around 2.4-2.5% with equal probability on Polymarket for each.
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why this report is important now
The oil shock. In July, the price of oil jumped nearly 21% when continued conflict in Iran threatened energy markets. J.P. Morgan Wealth Management now predicts a 25bps rate hike in September due to "supply-chain shocks related to the continuing Iranian conflict that are keeping energy costs elevated and renewed skepticism about the Fed's resolve to control inflation."
The market has already accounted for a September hike. Fed funds futures suggest roughly a 65% probability of the September rate hike. At the July FOMC meeting, the Fed voted 9-3 in favor of holding rates steady.
Three FOMC members supported an immediate rate hike.
The Federal Reserve has not offered clear forward guidance since the July meeting, leading many to question the credibility of the Fed, thus, increasing the probability of a September rate hike.
Long-term yields are rising, showing inflation worries aren't past yet. The 30-year Treasury hit its highest level since 2007 immediately after the July Fed meeting ended. Investors are repricing the risk of long-term inflation, which would make them more sensitive to signs that the Fed is losing credibility.
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three scenarios
1. Goldilocks (Core CPI between 2.3-2.4%)
A significant downside surprise which would indicate inflation has cooled without it completely dropping off.
DXY could drop toward 98.60-99.00
Gold price could break $4,300
September rate hike probability under 50%
2. Mixed (Core CPI at 2.5%)
This outcome indicates inflation has cooled minimally and will likely be met with a muted reaction from the market.
DXY expected to remain between 99-100.5
Gold likely to remain near $4,100-$4,200
September hike will remain 50-50 as markets remain split
3. Hot (Core CPI at 2.6%+, services inflation sticky)
A third month of a hot inflation report would give more credence to a rate hike in September.
DXY could rally toward 101.80-102.00
Gold price could test support at $4,000
September rate hike probability could be over 70%
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what to watch for
Services inflation which can be the stickiest of all, is key to determining wage inflation. Housing costs continue to rise, alongside AI-driven demand which doesn't shift along with oil prices.
Revisions from previous months can be quickly reported and change the markets' perspectives - just as we saw with the jobs report.
September countdown, after Wednesday, traders will look to PPI (August 13th), PCE (August 26th), and then finally the CPI release on September 11th, four days prior to the Fed's rate decision. This is one of five inflation reports deciding the outcome of the September Fed meeting.
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