Data from the U.S. Bureau of Labor Statistics showed the U.S. headline inflation clocking in at 0.2% m/m in August, the same as July’s rates and analysts’ estimates.
The annual headline inflation slowed down sharply from 2.9% to 2.5%, slower than the market’s 2.7% estimates. In fact, 2.5% marks the slowest since March 2021!
Headline CPI (m/m): 0.2% (0.2% expected and previous)
Headline CPI (y/y): 2.5% (2.7% expected, 2.9% previous)
Core CPI (m/m): 0.3% (0.3% expected, 0.2% previous)
Core CPI (y/y): 3.2% (3.2% expected, 3.2% previous)
But before you say “COOL INFLATION MEANS MORE RATE CUTS” you should know that the monthly core reading ticked higher from 0.2% to 0.3% as shelter costs rose by 0.5% while airline fares and motor vehicle insurance also saw notable increases.
Link to U.S. Consumer Price Index for August 2024
Market Reactions
U.S. dollar vs. Major Currencies: 5-min
Overlay of USD vs. Major Currencies Chart by TradingView
The U.S. dollar, which saw bearish pressure during the Asian session, extended its intraday recovery and jumped way higher at the report’s release.
The Greenback soon pulled back down, however, and the dollar looked like it spent the rest of the day trading in a risk-friendly trading environment.
See, the hotter-than-expected core CPI reading tempered calls for a 50bps interest rate cut from the Fed this month. Instead, the markets are pricing in a 25bps rate cut in September and another 25bps cut in November.
The CME FedWatch tool now predicts an 86.0% chance of a 25bps rate cut in September, much higher than the 66.0% chance before the report was released. Chances of a second 25bps cut in November also rose from 27.4% to 48.2% after the CPI report’s release.
The Fed not needing to resort to steep rate cuts calmed investors who were worried about the major central banks needing extreme measures to catch up to their respective economies.
USD spent the rest of the trading session trading higher against safe havens like CHF and JPY but lower against “risk” currencies like EUR, GBP, AUD, NZD, and CAD.