CPI Clears the Way for Fed Pause

CPI can’t stop the rally. The much-awaited August CPI print came in slightly above expectations, but not enough to create concern among market participants. Rates jumped to their intraday highs following the release but rallied throughout the remainder of the session. The policy sensitive 2-year UST yield dropped over 5bps to 4.97% while the 10-year yield declined 3bps to 4.25%. A Fed pause now seems all but guaranteed, fed funds futures pricing in a minuscule 2.3% chance of a Fed rate hike next week.

Inflation could remain elevated. Headline CPI of 0.6% MoM was the highest level in over a year and was driven predominantly by higher gas prices. Core CPI increased 0.3% MoM, the first acceleration since April, and remains above the Fed’s long-term inflation target. While today’s market reaction to the inflation data was relatively sanguine, the Fed’s fight against inflation appears to be far from over.

CPI out, PPI in. Inflation week is just getting started, and PPI is next on the slate. The Fed will hope for a slowdown after July’s PPI data exceeded forecasts. Headline MoM PPI is projected to increase to 0.4% from 0.3% last month, while core MoM is forecasted to revert to 0.2% after a surprisingly high 0.3% print in July.