US CPI PREVIEW (13:30BST/08:30EDT): Headline CPI likely to moderate in August, but core inflation is seen rising; data will likely lend support for a 75bps rate hike in September

• The consensus expects US headline inflation to decline in August by 0.1% M/M (vs a previous unchanged reading), which would be the first monthly decline in two years; the annual headline measure is seen paring to 8.1% Y/Y (prev. 8.5%). The core rate of inflation, however, is seen accelerating to +0.4% M/M (prev. +0.3%), which should lift the annual rate of core inflation to 6.1% Y/Y (prev. 5.9%).


• The data release will form a key part of building expectations around the FOMC’s September 21st confab; a hot reading would likely tilt the central bank to act more aggressively, as it prioritises capping price pressures over supporting growth, while a softer reading would give it license to opt for less aggression.


• After a solid jobs report for August, upside surprises in the influential ISM business surveys for the month, along with hawkish rhetoric from Fed officials, money markets are assigning an 89% chance that the central bank will opt for the larger 75bps rate hike, rather than a smaller 50bps increment, though many have emphasised that their decision at the September confab will hinge on incoming data.


• Some on the Fed (Bullard) have even argued that today's data shouldn't change the dial too much for the September meeting, since the Fed wants to see months worth of progress.


• One of the more broader themes traders will be monitoring is the impact the data has on expectations of the cumulative amount of hikes the Fed will fire this cycle; the more constructive tone of macro indicators in Q3 has seen market expectations of the terminal rate rise from the 3.50-3.75% range when the quarter began, to the current 3.75-4.00% range, which could be seen by the end of this year. Note: the Fed’s June forecasts, which will be updated in September, envisaged a terminal rate at 3.8% in 2023.


• Analysts note that, historically, the Fed has typically stayed at terminal for between 3-15 months, with the average being around 6.5 months; the upshot is that if terminal is achieved in Q1 2023, it could imply a rate cutting cycle will begin in H2-2023.

13 Sep 2022 - 11:45- Research Sheet- Source: Newsquawk