US CPI comes in hot again

Consumer inflation in the US has come in hot once more in September. Here is the breakdown of the data:

  • US CPI (headline) MoM +0.4%
  • US CPI (headline) YoY +8.2% (down from 8.3% in August) – which is higher than the 8.1% forecast
  • US CPI (core) MoM +0.4%
  • US CPI (core) YoY +6.6% (up from 6.3% in August) – which is higher than the 6.5% consensus forecast

Both year-on-year measures were once more above consensus estimates.

Here is the official breakdown of the data from the US Bureau of Labor Statistics. We can see that although energy pricing pressures continue to dissipate, food remains a key driver of the stubbornly high inflation. 

What does this mean?

The concern at the Fed is that inflation is not falling, but still rising on a core basis. This is still a homegrown issue and will require an ongoing aggressive monetary policy response from the Federal Reserve. 

The response has been decisive. Earlier this morning, Fed Funds futures were looking at a probability of around 85% to 90% for a 75% hike in November. There has been a sharp re-pricing. A 75bps hike is now a given, but there is also a small potential (c. 5% to 10%) for 100 basis points. 

Fed speakers have been fairly insistent on 75bps. However, in the run-up to the Fed’s blackout period on 22nd October, will the likes of James Bullard and Loretta Mester (seen as the most hawkish on the FOMC) be pushing for 100bps?

Initial Market Reaction

Market reaction has been significant. Treasury yields have spiked higher. The USD has strengthened on major forex. Precious metals have spiked lower and equity markets are selling off. In summary, this is USD positive and risk negative.

US bond yields have spiked higher. Both the 2s and the 10s have added around +20 basis points. They are effectively close to pricing in an extra rate hike of a quarter of a per cent.

A spike higher in yields is once more fuelling USD gains. EUR/USD has dropped sharply, by between -80 and -100 pips. Higher US yields have been a massive driver of USD/JPY gains for months. It is interesting to see USD/JPY spiking around. Markets may be worried that this strengthening of the pair will induce some sort of currency intervention by Japan again.

We are also seeing US equity futures sharply lower (and still falling). S&P 500 futures have fallen by -135 ticks. Finally, there has also been a huge move lower on gold, by around -$30. 

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.