14 September 2022
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US inflation slows but exceeds expectations

By Edward Bell

  • US CPI inflation for August came in hotter than expected with the headline index rising by 8.3% y/y, marginally lower than the 8.5% recorded for July and ahead of estimates of 8.1%. On a monthly basis, the CPI index rose by 0.1% compared with expectations for a similar sized decline. But more worryingly for the US economy was a 0.6% gain in core CPI (up 6.3% y/y). According to the Labor Department which compiles the data, increases in shelter, food and medical services were behind the month/month increase with the headline number being weighed down by a drop in gasoline prices last month. Markets will now fully expect another large 75bps hike from the Fed at next week’s FOMC meeting and likely a revision higher in inflation estimates and higher projections in the Fed’s dot plot, including a much higher terminal rate than current market expectations.
  • The unemployment rate in the UK fell to 3.6% in the three months ending in July, according to the latest data from the Office of National Statistics. The jobs report was better than expected and an improvement on the 3.8% recorded in the prior three-month period. The details of the data though showed that an increase in overall “inactivity” helped to support the improvement in the unemployment rate as actual jobs growth was limited to 40k. However, wage pressures still indicate the tightness in the labour market with average wages ex-bonuses rising by 5.5% y/y compared with 5.1% a month earlier. The pass through from higher wages will help to kick inflation sticky in the UK even if the government is able to control energy prices through its price cap regime. The Bank of England’s meeting for this week has been postponed following a mourning period for the death of Queen Elizabeth II but a further hike to the base rate is widely expected.
  • Germany’s ZEW investor confidence index fell for September to -61.9 from -55.3 for future expectations while sentiment around current conditions also deteriorated to -60.5 from -47.6 in August. High energy costs, and a potential cap of usage, will be weighing on investor sentiment as the Eurozone generally looks to be staring down a pending recession. Germany’s chancellor, Olaf Scholz, said that Germany will make use of an electricity price cap with “great speed” though pushed back against applying a cap on natura gas prices.
  • Industrial production in Turkey fell sharply in July, down by 6.2% m/m and slowing to 2.4% y/y from over 8% a month earlier. Manufacturing dropped by 6.6% m/m in July compared with growth of 1.7% a month earlier. The industry numbers came in well short of market expectations and represented the slowest pace of annual growth since Q2 2020.

Today’s Economic Data and Events

  • 10:00 UK CPI August y/y: forecast 10%
  • 10:30 IN wholesale prices August y/y: forecast 12.95%
  • 16:30 US PPI August y/y: forecast 8.8%

Fixed Income

  • US Treasuries slumped following the hot August CPI print. Yields on the 2yr UST soared by 18bps to 3.756% while the move in the 10yr was more contained at a 5bps gain by the close to settle at 3.4080%. Markets are now fully expecting a 75bps hike at next week’s FOMC meeting and another 75bps at the November meeting as well. Projections for the terminal rate have also moved up to 4.6% by mid-2023.
  • The sell-off in government bonds extended to Europe as well with the 2yr Schatz yield up by 8bps to 1.368% and the 10yr bund yield rising by 7bps to 1.722%. European Commission plans to address the Eurozone’s energy crisis may move to the back seat for now as attention turns again to how aggressive central banks will need to be to push back against inflation. Gilt yields were also higher, up by 9bps to 3.166%.
  • Bonds generally were hammered in the wake of the CPI print with an index of high-yield bonds falling by 1% overnight and a USD EM index falling by 0.55%. A Bloomberg index of UAE bonds also dropped, down by 0.2% though spreads did narrow given the big move in benchmark bonds.


  • The August inflation print looks to have put paid to the “death of the dollar” theme that has characterized markets in the last few sessions as the greenback soared against all comers. EURUSD dropped by 1.5% overnight to close at 0.997, its lowest level since the start of the month while GBPUSD fell by 1.6% to 1.1493, its weakest close since the pandemic level of 1.1485. USDJPY also jumped, up by 1.2% to 144.58.
  • Commodity currencies showed even wider moves with AUDUSD down by 2.3% at 0.673 while NZDUSD fell by about the same amount to back below the 0.6 handle. USDCAD rose by 1.4% to 1.3168.


  • The upside surprise in the US CPI inflation print yesterday weighed heavily on equity markets as many fell by the sharpest move in over two years. The growth-sensitive NASDAQ was as ever one of the worst affected by the prospect of higher rates. It lost -5.2%, but there were also significant losses for the Dow Jones (-3.9%) and the S&P 500 (-4.3%).
  • European markets also closed lower, as the FTSE 100, the CAC and the DAX dropped -1.2%, -1.4% and -1.6% respectively.
  • In Asia, both the Shanghai Composite (0.1%) and the Nikkei (0.3%) managed to secure modest gains earlier in the day, but Asian markets have followed the US into the red this morning, and the Nikkei is currently trading down -2.1% and the Shanghai Composite -0.4%.


  • Oil prices were relatively restrained in their downward move with Brent futures falling by 0.9% to USD 93.17/b while WTI fell by just 0.5% to USD 87.31/b. Both contracts are nudging higher in early trade today. Markets will be waiting today for the IEA report on oil markets, their first to consider how OPEC will be more interventionist in markets.
  • OPEC maintained is oil demand expectations for 2022-23 roughly intact in its monthly oil market report, expecting demand growth of 3.1m b/d this year and 2.7m b/d next year. For 2023, that growth expectation may be a challenge given headwinds to demand on the back of looming recessions in many economies.

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Written By

Edward Bell Head of Market Economics

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