DBS Group Research economist Eugene Leow emphasizes that the upcoming US CPI data will be crucial in guiding the Federal Open Market Committee's (FOMC) September policy decision, with recent benign inflation and firm labor market data keeping the odds of a Fed rate hike elevated at around 60% for September [1]. Currently, frontend USD rates are largely priced in, with just over 2.5 hikes already factored into the market and the 2-year rate hovering near 4.4% [1]. Leow notes that the past few inflation prints have been benign, particularly due to muted increases in the transport component, and there are no signs of broadening price pressures [1].
According to Leow, CPI and core CPI readings of 0.4% month-on-month (MoM) seasonally adjusted and 0.3% MoM respectively would be the minimum required to nudge market participants toward increasing the odds of imminent tightening. Conversely, a 0.2% print in both figures would likely see the odds of imminent tightening fall closer to zero [1]. The market focus is now squarely on inflation, as labor market data alone has not been sufficient to decisively sway investor sentiment [1].
Leow further states that frontend USD rates are adequately priced for a hawkish Fed, with current pricing already reflecting some concerns about rising oil prices, as Brent crude is trading around USD 99 per barrel [1]. He suggests that with just over 2.5 hikes already embedded, there is limited upside for rates, and a strong CPI print would likely lead the market to frontload the hike cycle rather than price in additional hikes [1].
CONCLUSION
The upcoming US CPI release is expected to play a pivotal role in shaping the Fed's September policy decision, with markets already pricing in over 2.5 hikes and limited further upside for USD rates. Investors are closely watching inflation data, as a strong print could accelerate the hike cycle, while a weaker print may reduce the odds of imminent tightening.