US and European futures are trading soft as traders are focused on one data set and one set alone, which is the US CPI inflation number. A collapse in this data could vastly change the narrative among traders, and we could see equities rallying. However, it would be incorrect to say that the Fed will take its foot off the gas pedal even if inflation drops from its peak. The current inflation in the US is still at least four times higher than the Fed target, which means that the Fed has a long way to go before it can breathe normally. Market players are likely to celebrate a lower reading of US CPI as this will confirm that inflation is off its highs.
The US CPI
The Federal Reserve’s decision on how much to increase interest rates next week and, more significantly, in the long term is widely speculated to be influenced by the report, making it critically important. To combat inflation, the Federal Reserve is generally anticipated to raise interest rates by 0.75 percentage points (the third increase in a row) next week. Some analysts have speculated that the Fed may only hike rates by a half percentage point if inflation data turns out to be less than predicted.
Traders expect the consumer price index (CPI) for all goods to fall 0.1% month-over-month in August, after a flat reading in July. Headline CPI would therefore be rising at an annual rate of 8%, slowing from July’sJuly’s rate of 8.5%.
Since headline inflation is forecasted to decline and core inflation, which excludes energy and food, is predicted to climb, Tuesday’s announcement of the consumer price index might be a little confusing.
UK’sUK’s Port and Economy
In a growing labour dispute that threatens to pressure the British economy further, dockworkers at the UK’s Port of Liverpool rejected their employer’s latest salary offer, setting the scene for a two-week strike at the nation’s fourth-biggest gateway for global commerce. At a stop-work meeting late yesterday, port workers and the engineering department voted unanimously against accepting a 7% salary raise and a one-time payment of £750 ($875) from Peel Ports Ltd. According to the organisers, about 500 people were there, and they promised to picket nonstop beginning on September 20. As the UK prepares for the Christmas shipping rush and the coming winter of skyrocketing energy costs, its supply chains are becoming more tenuous.
Geopolitics
Beijing’s top diplomat stated that China is ready to cooperate with Russia to move the international order “in a more fair and reasonable direction” highlighting the close connections between the two countries. Yang Jiechi told Russian Ambassador Andrey Denisov yesterday in Beijing that under the leadership of Presidents Xi Jinping and Vladimir Putin: “the relationship between the two countries has always been on the right track, and both sides firmly support each other on issues relating to their core interests.”
Forex
While Japan’s foreign exchange reserves are stronger than the last time it interfered in the markets to strengthen its currency, unilateral action is considered unlikely to succeed without the cooperation of the United States. Tokyo will depend on reserves it had amassed at a higher rate than the growth in the local currency market since 1998, when it intervened to support the yen towards the tail end of the Asian financial crisis if it decides to act alone to preserve the sinking yen. At the end of August, Japan had $1.17 trillion in foreign currency reserves, while the average daily trading volume of the yen in Tokyo was roughly $479 billion. That’s a significant increase from the 1.4 times margin it had in April 1998 and represents 2.4 times the daily value of the currency market.