A 75 bps rate hike estimate at the next meeting remains unchanged!
While the market had a positive reaction in the first hours after inflation data was published, looking at the numbers with more precision shows that being over-optimistic is a bit early!
US consumer Price Index decreased to 8.5% (from 9.1% in June) on the annual scale, however in the monthly scale it was unchanged in July. The main reasons for this downward were lower gasoline and used auto prices, as well as cheaper traveling services. If we look at the inflation excluding Energy and food price, we can see that Core CPI did not ease and stayed unchanged and is still up at 5.9% year-over-year. Core CPI has grown at a 6.8% annualized pace over the past three months.
Just one week before the next FOMC meeting we will have the August inflation numbers on September 13. With one decrease after months of increasing inflation, it is early to talk about peaking inflation, however, if the next report provides additional evidence that inflation is slowing on a sustained basis, then we can 50 bps rate hike is acceptable, otherwise, inflation is still high and it requires a fast reaction from FED.
The belief in high inflation is also confirmed by Evans. After CPI data was published, Chicago Fed President Charles Evans said that it was the first positive inflation report, but numbers are still unacceptably high. However, he does not believe in recession, as he told: "The economy is almost surely a little more fragile, but would take something adverse to trigger a recession." (Reuters)
Wall Street's main indexes rose after the report. At the time of writing, Dow Jones Industrial Average gained 1.5%, SP500 is up by 1.9%, and Nasdaq moving forward by a 2.5% gain, as traders cut their bets on a third straight 75-basis-point interest rate hike in the September meeting for now!
Technical indicators in the daily chart also have the almost same signal. While at first look SP500 is raising, market volume and sentiment, still cannot confirm it with more confidence. Trading stable above $4,200 can change this sentiment, otherwise, side movement before more evidence to create a trend is what we can expect for now.
