Is the Fed Gearing Up for Another Rate Hike?

The headline CPI quantity was cooler than anticipated, however that’s the solely excellent news within the report.
The FOMC is on observe to hike charges once more, and the market is misprising the danger.
Oil costs underpin inflation and are on the rise.

The market breathed a sigh of reduction when the July information was launched, however there’s nothing within the information for bulls to cheer. The comparatively cool nature of the information is a constructive sign however 1 during which the information is much less dangerous than earlier than and never really good.

The takeaway is that inflation cooled through the spring and summer season and allowed the market to rally; the elements that led to the final main inventory market correction are nonetheless in place; the dangers for one more vital correction proceed to develop, and they’re centered on inflation, the FOMC, and oil costs.

The CPI Knowledge Leaves A Lot To Be Desired

What was so dangerous in regards to the CPI information? All the things. The CPI got here in cooler than anticipated on the headline degree in comparison with final month, however we’re speaking 0.1% of weak spot in a quantity that accelerated from the prior month. That alone is cause to consider that the Fed isn’t via mountain climbing charges, and the remainder of the information within the July report was solely as anticipated.

With core inflation working at 4.7%, there’s completely no cause to assume the Fed will minimize charges anytime quickly and each cause to consider the committee will maintain its finger on the rate-hiking set off.

The subsequent Fed assembly is barely a month away. The CME Fedwatch Instrument signifies a 90% probability that there might be no fee hike at this assembly, and there’s solely a 33% probability the Fed will hike once more by the tip of the 12 months. That’s opposite to the Fed’s rhetoric that a number of extra hikes could also be wanted and there’s extra threat to the market this week.

The assembly minutes from July are due on Wednesday and might be intently scrutinized for indicators to the subsequent FOMC transfer. Traders ought to anticipate the Fed to stay hawkish, and it may intensify the rhetoric.

There may be cause to consider that as the autumn progresses. Throughout the July CPI report, the three key parts of client inflation all elevated, together with meals, power, and shelter.

Shelter prices are unlikely to say no because of the low availability of housing, whereas meals and power costs are on observe to rise considerably over the subsequent few months and quarters. Backside-line, the market is mispricing the Fed.

OPEC+ Is Driving Inflation Now

It’s uncanny how the value of oil is correlated to inflation. The oil worth topped alongside the very best peak in client inflation in 2022, bottoming with the lows in 2023. The worth is now transferring off a flooring and can seemingly proceed to and drive inflation with it.

The most recent forecasts from the IEA present that demand progress is slowing and manufacturing progress is increased than earlier than, however manufacturing continues to be lagging behind demand. Demand is predicted to common 102.3 Mb/d in 2023 and rise to 103.3 Mb/d in 2024, whereas manufacturing will lag at 101.5 Mb/d and 102.1 as a consequence of OPEC+ manufacturing cuts. That situation will lead to declining world stockpiles and rising oil costs.

The value of WIT hit a brand new 1-year excessive within the 1st half of August. The oil worth is pulling again from that prime now however not considerably so, and the motion has bullish overtones.

The current rally seems sturdy and has the value above the 150-day EMA, suggesting the market tide has turned. Assuming the market follows via on this sign, WTI could possibly be buying and selling at $90 by mid-September; $90 is the low finish of the vary oil traded whereas consumer-level inflation raged at its highest ranges.

PCE Inflation could not spike above 6.0% once more, however it might be sensible to imagine that inflation will speed up once more earlier than the FOMC is thru.

Unique Submit