Cooling US CPI Numbers Give Hope for Soft Landing 

On Tuesday evening (GMT+3), the US Consumer Price Index (CPI) for July was released, showing a year-on-year growth of 8.5% – lower than the expected growth of 8.7% and the previous month’s increase of 9.1%. Core CPI, which excludes volatile categories like food and energy, comes in at an increase of 0.3% month-on-month, lower than the expected 0.5% increase. 

However, breaking things down, we see food prices growing at their fastest pace since 1979, with a yearly increase of 10.9%. This is mostly cancelled out by dropping energy prices from the month before. Gasoline is down 11% month-on-month for July. 

Thanks to a combination of pandemic-related easy monetary policy, supply chain disruptions, and most recently the war in Ukraine, inflation has been accelerating since 2021. “Things are moving in the right direction,” said Aneta Markowska, chief economist at Jefferies. Some analysts, however, have pointed out that current inflation reads are still far from the Fed’s landmark goal of 2%.

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Investors have turned risk-on at the cooler-than-expected inflation numbers, which are giving hope for a so-called “soft landing” where monetary tightening is balanced with economic growth thus avoiding a recession.

The money markets are now betting on a 58.5% probability of a 50-point interest rate hike in September – a drop from the last two 75-pointers.

Predictably, the US dollar tumbled, with the Dollar Index dropping 1.08% on Wednesday, while the euro and pound both rose 0.84% and 1.15% respectively. 

More significantly, the Japanese yen has rallied after months of weakening due to policy divergence between the Bank of Japan and the Fed. The yen soared 1.6%, with USDJPY dropping to 133 levels. 

Stock markets have also rallied at the news, with the S&P 500 rising 2.13%, and the DJIA up 1.6%. Meanwhile, the tech-heavy Nasdaq 100 increased 2.8% – putting it 20.7% above its mid-June low and in what is technically a bull market. 

Meanwhile, gold has wavered as risk appetites dropped, sinking to a low below $1700 before hitting the $1785 region. 

Investors are strongly advised to look out for the US PPI (MoM) data for July, which will be released at 15:30 (GMT+3) on Thursday and has a forecasted increase of 0.2%. Like the CPI, the PPI is a leading measure of inflation, but measures cost from the seller’s point of view and does not include imports.

As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.