Stronger US core inflation reduced the odds of a 50 bps Fed rate cut

Data from the US Bureau of Labor Statistics showed that US headline inflation reached 0.2% m/m in August, the same as July rates and analysts’ estimates.

Annual inflation fell sharply from 2.9% to 2.5%, slower than market estimates of 2.7%. In fact, 2.5% marks the slowest since March 2021!

Title CPI (m/m): 0.2% (0.2% expected and previously)
CPI title (y/y): 2.5% (2.7% expected, 2.9% previously)

Core CPI (m/m): 0.3% (0.3% expected, 0.2% previous)
Core CPI (y/y): 3.2% (3.2% expected, 3.2% previously)

But before you say “COOL INFLATION MEANS MORE RATE CUTS”, you should know that the monthly base rate rose from 0.2% to 0.3% as shelter costs rose by 0.5% , while airline fares and motor insurance saw notable increases.

Link to US Consumer Price Index for August 2024

Market reactions

US Dollar vs. Major Currencies: 5 min

USD chart overlay against major currencies by TradingView

The US dollar, which saw bearish pressure during the Asian session, extended its intraday recovery and jumped much higher on the release of the report.

However, the dollar appeared to spend the rest of the day trading in a risk-friendly trading environment.

You see, the hotter-than-expected core CPI reading tempered calls for a 50bp interest rate cut from the Fed this month. Instead, markets are betting on a 25 bps rate cut in September and another 25 bps cut in November.

The CME FedWatch tool now predicts an 86.0% chance of a 25bps rate cut in September, up from a 66.0% chance before the report was released. The odds of a second 25bp cut in November also rose from 27.4% to 48.2% after the CPI report was released.

The need for the Fed to resort to steep interest rate cuts calmed investors who were worried that major central banks needed extreme measures to recover their savings.

The USD spent the rest of the trading session trading higher against safe havens like CHF and JPY, but lower against “risky” currencies like EUR, GBP, AUD, NZD and CAD.