CPI bombshell makes for an uncertain environment where cash may be king


US inflation has climbed to a 41-year high. The headline CPI for June printed at 9.1% YoY (8% forecast) and 1.3% MoM (1.1% forecast). Of concern, the higher inflation is across the basket, with most components higher. Even with volatile items stripped out, the core numbers were higher than expected - 5.9% YoY (5.7% - forecast) and 0.7% MoM (0.5% - forecast).

The Fed will release the FOMC statement on Wed, 27 July. Currently, futures are pricing at 60% probability for 75bps and 40% for a full 100bps. This hawkishness has pushed the 2-10 yield curve further into inversion. The bond market is concerned about future economic activity and recession fears.

Rate hikes are designed to dampen demand-pull inflation. However, the gasoline index was up 11.2% MoM, and food inflation was 1% higher. I.e. until there are signs of relief on the supply side, higher rate hikes will hurt economic activity. This stagflationary setup puts policymakers in a challenging position.

A policy cannot deal with the supply shocks impacting the economy. Market participants are aware of this and will continue looking for a return commensurate with the heightened risk. In this environment of uncertainty, prices are still adjusting. Thus it seems, for the time being, participants may have settled on "cash is king."

Image by Steve Buissinne from Pixabay

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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