Business

Hot US Aug CPI seen cementing aggressive FOMC

Monthly U.S consumer prices unexpectedly rose in August as declining gasoline prices were offset by gains in the costs of rent and food, giving cover for the Federal Reserve to deliver another hefty interest rate increase next Wednesday.

The consumer price index gained 0.1% last month after being unchanged in July, the Labor Department said on Tuesday. Economists poll had forecast the CPI dipping 0.1%.

In the 12 months through August, the CPI increased 8.3%, decelerating from July’s 8.5% rise. The annual CPI peaked at 9.1% in June, which was the biggest gain since November 1981.

MARKET REACTION:

STOCKS: S&P 500 futures turned sharply lower, last down 2.2%

BONDS: The yield on 10-year Treasury notes rose and were up 8.3 basis points to 3.445%; The two-year U.S. Treasury yield, surged and was up 17 basis points at 3.741%

FOREX: The dollar index rose 1.035%

COMMENTS:

THOMAS HAYES, CHAIRMAN AND MANAGING MEMBER, GREAT HILL CAPITAL, NYC
“The good news is “peak narrative” holds as July was the highest print. The bad news is the upside miss cements a third 75 bps hike next week. So the market will trade heavy for a day or two until participants can refocus on fundamentals/earnings of businesses – which are holding up nicely despite a challenging environment.”

MONA MAHAJAN, SENIOR INVESTMENT STRATEGIST, EDWARD JONES, ST LOUIS

“With the rally over the last week and yesterday, the market’s risk reward coming into this report was a little skewed to the downside anyway even if we did get a report that was in-line or slightly below expectations. This report was a negative surprise with hotter inflation.”

“We did get the drop in energy and oil and gas prices that we were looking for but the rest of the report still looked pretty elevated.”

“We know that the shelter, rent and services components generally are stickier and tend to remain elevated for longer but what we’re seeing in underlying fundamentals continues to be a softening – a cooling housing market, a potentially cooling labor market that would limit wage gains and maybe move them lower from here. So that over time should flow into core CPI as well.”

“Until we get inflation prints, not just one, but two, three, maybe four, moving downward steadily, that’s when we can call a trend and the Fed may feel some comfort in at least taking a pause. So until that period, I think we’re probably range bound and facing some volatility.”

KEN POLCARI, MANAGING PARTNER, KACE CAPITAL ADVISORS, BOCA RATON, FLORIDA
“I’m not surprised, I’ve been saying all along it is going to be hot, so 75 (basis points) is now locked and loaded, there is absolutely no discussion about that. And in my opinion, 50 in November is locked and loaded and I wouldn’t really be surprised if they went off key-here and did an intermarket rate rise in October.”

“Futures did a huge turn. Inflation was supposed to show a cooler print, PPI tomorrow is now potentially going to be hotter too, that just suggests that it is not responding as quickly to the Fed action as everyone said it would and was supposedly happening. That just shows that it is not which means that the Fed is going to remain aggressive for longer. If that print had come in soft at 8% or 7.9%, the market would have continued to rally, but because it came in hotter it suggests it is being a little bit more stubborn so be prepared for more hikes. That pivot idea and that ‘let’s cut rates’ idea is out the window.”

DOUG FINCHER, PORTFOLIO MANAGER, IONIC CAPITAL MANAGEMENT, NEW YORK CITY “The longer term view is pretty clear here, that monetary policy is a very blunt instrument and anybody that thought inflation would start to roll over just because the Fed’s hiked a couple times is pretty ignorant to the way economics works.”

“It takes a long time to introduce inflation into the economy and it takes a long time for it to slow down. And I think it’s clear here. People were expecting inflation to peak and read into that reversal and interest rates next year, which we think is just absolutely naive to think that’s going to be the case. It’s 100% chance now priced in that we get 75 basis points next week and who knows what the next hike is going to look like.”

“Crude prices started to come down and people took that in recent weeks as a hint that inflation was slowing. But you know the difference between the core and CPI excludes food and energy.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“These numbers are disappointing. The core rate decline has reversed after two months of moving lower.”

“This suggests an aggressive move by the Fed is on the horizon. The chance of the Fed moving back to less aggressive rate hikes over the next quarter is off the table. Perhaps another (75 basis point rate hike) in November and maybe one more in December.”

“Headline prices have come down, but the reversal breaks a trend and that’s why the Fed is going to stay aggressive. Bottom line, it only fortifies the Fed’s hand for a tougher inflation fight.”

“Obviously, the markets are not pleased with these numbers. Equities are falling out of bed out in premarket.”

STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON

“Stronger than expected US headline CPI number, albeit marginally softer than last month’s print. However, the real story is the fact that the core rate is continuing to rise and which now makes another 75bps hike being delivered by the FOMC this month look like a certainty. With the fall in the headline rate being almost wholly attributable to cheaper gasoline prices, it appears US consumers are simply reallocating this extra spending power toward other goods and services, the implication of which is a broadening of inflationary pressures throughout the economy. Overall, the report will not be happy reading for the Fed.”

“The CPI release will have knocked back hopes that inflationary pressures are slowing to the degree hoped for. This implies the Fed will remain in tightening mode for longer and suggesting interest rates still have some way to go before they reach the terminal rate.”

KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO
“The data was far stronger than expected. Particularly worrisome is the fact that core inflation came in almost double estimates. This is going to put the idea of transitory inflation to bed for now and anchor U.S. yields and the dollar substantially higher. The key thing here is that we’re now looking at near-certain odds on a 75 basis point move next week, but also potentially a 50 basis point or higher move in November.”

GREG BASSUK, CHIEF EXECUTIVE OFFICER, AXS INVESTMENTS, NEW YORK CITY
“All eyes were focused on the core inflation data and the challenge there is when you take out energy and food, many believe that’s a very good gauge of price levels and so investors are going to digest that.” “We think that the Fed is going to continue to try to rein in the elements that have been driving prices higher but the new information is that these two consecutive months July and August have a more dampening set of numbers. We think that removes the possibility of the Fed being more aggressive than 75 basis points.” “Investors should remain cautious and vigilant, with respect to any additional economic data that could support potentially future rising prices in part because today’s numbers also show that core inflation, which takes out energy and food and tend to be more volatile, actually rose.”