The markets are awaiting the US inflation data

The markets are awaiting the US inflation data, which will guide the US Federal Reserve’s direction. Today, the Consumer Price Index (CPI) reading will be released from the United States.
While the Federal Reserve monitors the Personal Consumption Expenditures (PCE) index as a core indicator of inflation, the Consumer Price Index is also considered an important inflation indicator, which could provide insights into the Fed’s preferred indicator expectations.
Market expectations suggest the possibility of the Consumer Price Index showing the first increase in inflation after 12 months of decline.
The markets anticipate the inflation reading to have risen to 3.3% last month, compared to 3.0% in June. However, the markets are particularly focused on the core inflation data, which excludes food and energy prices.
It is expected that the core inflation reading will remain stable at 4.8%. Due to the increase in oil prices last month, the core reading might be a more significant reflection of the change in US inflation.

Asset performance as the markets await US inflation data:

Today, the US dollar is experiencing a decline against a basket of major currencies. Traders currently expect the Federal Reserve to keep interest rates unchanged throughout this year, with a certainty of up to 62.9% according to the CME Group.
However, around 28.6% of traders expect the Federal Reserve to raise interest rates once or twice this year. About 8.5% of Federal Reserve followers expect a rate cut.
As a result, we have seen downward pressure on the US dollar amid expectations of no interest rate hike this year. With the dollar’s decline, the euro has risen to $1.10, compared to $1.09 yesterday.
The British pound has also modestly increased, trading within a range of $1.27. The Japanese yen weakened against the US dollar to 144 yen before slightly recovering to 143.
Yesterday, the US stock markets experienced widespread profit-taking ahead of the important inflation data release. The Dow Jones fell 0.54%, while the S&P 500 declined by 0.70%. The tech-heavy NASDAQ, which is more sensitive to interest rate expectations, dropped by 1.17%.
However, today, US stock index futures have rebounded, with the Dow Jones gaining around 0.50% and the NASDAQ rising 0.63%. Standard & Poor’s 500 index futures for major US companies also rose by about 0.55%.

Precious metals and oil

Gold prices are seeing a slight increase today, benefiting from the decline in the US dollar. The precious metal is trading close to $1920 per ounce.
Gold prices fell to around $1914 per ounce yesterday, influenced by bond market movements. The recent US government bond auction for ten-year maturities saw an increase in bid coverage to 2.6 times, compared to 2.5 times in the previous auction.
Additionally, the highest required yield on bonds increased from 3.86% in the previous auction to 4.00% in the latest one. Despite a recent credit rating downgrade by Fitch from AAA to AA+, US bond auction data indicates that traders were not significantly affected.
Returning to precious metals markets, silver prices have recovered from losses yesterday but remained in the range of $22 per ounce. The increase in silver prices today follows a three-session consecutive decline.
In the energy markets, oil prices have ignored yesterday’s inventory data release and climbed, with Brent crude reaching $87 per barrel. West Texas Intermediate crude oil futures traded around $84 per barrel before retreating to a range of $83 per barrel.
US Energy Information Administration data showed an unexpected increase in inventories by 5.9 million barrels. Energy markets are benefiting from expectations of increased global demand and the voluntary reduction in production by OPEC+.

Interpreting the US inflation data release:

To begin with, it’s important to note that we are awaiting statements from Federal Reserve member Harker, in addition to the US federal budget data and the 30-year Treasury bond auction.
However, in general, the markets are focused on the specific US inflation data to guide the Federal Reserve’s decisions, making it likely the most important factor for today.
If the inflation data shows a higher-than-expected increase to 3.3%, and core inflation also rises unexpectedly above 4.8%, this could have a positive impact on the US dollar and a negative impact on gold and stocks, as it increases the likelihood of a further Fed interest rate hike.
Conversely, if the data shows a decrease in core inflation below 4.8%, and if overall inflation remains stable at 3.0% or decreases, this could have a negative effect on the US dollar and a potentially positive impact on gold and stocks.
However, if the values are conflicting, showing an increase in one aspect and a decrease in another, this could lead to mixed and volatile market reactions.
It’s important to recognize that the markets have been eagerly awaiting the US inflation data for some time, which may add complexity to how financial markets respond to the data release.

Understanding consumer behaviour and consumption habits

The markets will try to understand US consumer behaviour and consumption habits through readings of both core and overall inflation.
If it appears that the US consumer is guiding consumption, this may indicate no need for a further Fed interest rate hike. On the other hand, if the US consumer continues to spend freely without moderation, this could force the Fed to raise interest rates later.
The current dilemma facing the Federal Reserve is that the US consumer’s purchasing power remains strong in the face of robust labour markets. Therefore, the Fed will likely focus on labour markets and inflation data, particularly consumption spending and consumption habits.
The impact of consumption habits often shows up in the difference between regular inflation and core inflation readings.