CPI and PPI Ahead

Yields little changed ahead of inflation week. Swap rates and Treasury yields were mixed across a flattening curve today, with the 2-year yield inching closer to the 5% threshold after a rise of ~10bps on the week. A surge in corporate debt issuance was a main driver of the week’s UST sell-off, and upcoming CPI and PPI could produce significant rate moves. Futures currently suggest a ~48% chance of an incremental 25bp rate hike in 2023, while September’s meeting is seen as a likely pause.

Dollar rally continues historic rally. The Bloomberg dollar index increased for an eighth straight week, the longest run since 2005 as US economic strength continues compared to worsening outlooks in Europe and China. The run has sent the dollar’s 14-day relative strength index above 70, which is considered by some as a sign of an overbought market. Commenting on dollar strength, Laura Cooper at Blackrock said the dollar upside has been surprising, and she questions the sustainability given the expectation of hawkish pause signaling from the Fed. Conversely, HSBC economists expect the dollar to continue to strengthen as global economic growth outlooks continue to worsen.

Inflation figures loom in the week ahead. Next week’s slate will be highlighted by CPI and PPI, which are expected to produce mixed results. July’s core MoM CPI crystallized the smallest back-to-back monthly gains in 2+ years, and August’s level is expected to match that level at 0.2%. However, headline CPI is forecasted to jump higher both MoM (0.6%) and YoY (3.6%), a potential cause for concern for the data-dependent Fed. Furthermore, a continuation from July’s elevated PPI could spur rate hike bets, especially with September’s FOMC meeting fast approaching.