Sticky US core CPI reduces probability of 50bp rate cut from the Fed next week

Headline CPI in the US fell to 2.5% y/y in August from 2.9% in July, in line with market forecasts. The main drag on the index was energy prices, which fell -0.8% m/m. Lower oil prices so far in September should help to keep headline CPI low in next month’s reading as well. However, core inflation rose by a faster than expected 0.3% m/m in August, above expectations of another 0.2% m/m gain. The annual rate of core CPI was unchanged at 3.2% y/y. Housing costs, car insurance, hotels and airfares – all services - contributed to the rise in the core reading for August. The inflation data may be enough to persuade the Fed to cut rates more gradually, particularly as services inflation remains sticky. Indeed, Fed Funds futures are now pricing just a 17% chance of a 50bp rate cut next week, down from 33% on Tuesday.

UK industrial production unexpectedly declined in July, contracting -0.8% m/m and -1.2% y/y, below analysts’ forecasts. Manufacturing and utilities output fell m/m while oil & gas mining & quarrying output rose.

Key economic data and events today

16:15 ECB deposit rate forecast -25bp to 3.5%

16:30 US PPI (Aug) forecast 0.1% m/m and 1.7% y/y

16:30 US initial jobless claims (Sep 7) forecast 227k

Fixed Income

• Treasury yields rose on Wednesday as markets reduced the probability of a 50bp rate cut from the Fed next week, on sticky core inflation data. The 2y yield rose 5bp to 3.64% while the 10y yield rose 1bp to 3.65%. Both benchmarks are slightly higher this morning as well.
• European benchmark bond yields declined across the board on Wednesday, led by the UK where 10y gilts fell -6bp to 3.76%. 10y bund yields declined -2bp to 2.10%.

FX

• The dollar index was slightly higher again on Wednesday with the commodity currencies losing the most ground against the greenback. NZD weakened -0.2% while CAD was down -0.1%. JPY appreciated 1.0% to 141.58/USD while CHF gained 0.2%. EUR and GBP were largely unchanged on the day.

Equities

• US equities opened lower after higher than forecast core inflation data reduced the chances for an outsized rate cut by the Fed next week. However, tech stocks led a rebound during the session with the Nasdaq100 closing 2.2% higher on the day, while the S&P gained 1.1%.
• European stocks were mixed on Wednesday with the Dax rising 0.4% while the Cac40 declined -0.1%. The UK’s FTSE100 declined -0.2%.
• Regional equity markets declined on Wednesday led by the Saudi TASI which closed down -1.8%. The DFMGI and ADXGI both fell -0.9% yesterday.

Commodities

• Oil prices recovered some of Tuesday’s losses on Wednesday, with Brent up 2.1% to USD 70.61/b and WTI rising 2.4% to USD 67.31/b. Hurricane Francine made landfall in Louisiana and resulted in a shut-in of 670k b/d of production which has helped to put a floor under oil prices for the time being. The IEA will publish its monthly oil market report today.