US inflation jumps again
Headline US CPI has jumped to 9.1% in June, much higher than the consensus of analyst forecasts at 8.8%. The headline CPI was 8.6% in May. Furthermore, although there was a decline in core CPI to 5.9% (from 6.0%) this was also higher than the consensus forecast of 5.7%.
With the CPI basket rising by +1.3% Month-on-Month (+1.1% forecast), the big contributors to this leap were food and energy costs. Energy increased by +7.5% MoM (up 42% YoY) whilst whilst food increased by +1.0% MoM (+10.4% YoY).
It is interesting to see that even when you strip out the obvious variables of Food and Energy, the Service less energy services which are a key contributor to the core CPI are still well over 5%. There is plenty for the Fed to do to get inflation under control.
What does this mean?
Whilst the continued rise in the headline CPI is a concern, the core CPI also not falling back as quickly as hoped will be a concern too.
This further bolsters the hawkish positioning of the Fed to certainly hike by +75 basis points in July.
Initial Market Reaction
Markets have reacted fairly predictably to this surprise. US bond yields have jumped, the USD has strengthened, whilst US index futures have fallen. The Gold price also continues to be driven by its negative correlation with the USD.
- US 10-year yield – has jumped by around +10bps. Higher than expected inflation drives selling pressure on bonds and pulls yields higher. Interestingly also the 2-year yield (which is a gauge of US interest rates versus the longer 10-year yield which is more of a growth and inflation gauge) has jumped by c. +15bps. This is baking in expectations of even tighter monetary policy.
- EUR/USD – has dropped -40/-50 pips. Crucially it is once more testing the key parity level. For now, though there is still an appetite to defend parity. This will be a question throughout the US session into the close tonight.
- Gold – fell initially by -$20 but has then pared this to be only c. -$10 down.
- S&P 500 futures – equity futures have dropped sharply by around -70 ticks (between -1.5%/-2.0%). The fear of more aggressive monetary policy tightening that could drive recession (very bad for equities) is clear.
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