2 weeks ago
US CPI Aftermath: Equities, Gold React; September Rate Hike Uncertain
Think of inflation as how much more expensive things like food and toys get over time.
In July, prices in the US went up by 3.4% over the past year — just a little less than June's 3.5%.
That means prices are still going up, but a bit more slowly.
This news made many people think the Federal Reserve, the group that manages the country's money, will not raise interest rates in September.
Interest rates are the extra money you pay when you borrow, and raising them makes borrowing more expensive.
A popular tracker called FedWatch says there is a 66% chance the Fed will keep rates unchanged at its meeting on September 15 and 16.
Right after the news, gold and silver prices jumped, but then they slipped — gold fell below $4,400 an ounce and silver below $65.
Most US stock indexes rose, but many big tech companies did not gain; Nvidia went up 3%, while Alphabet went down a little.
Experts do not all agree on what will happen next, because high oil prices near Iran could push inflation back up.
The Fed will look at more reports, including August inflation and job numbers, before making its final decision.
July CPI rose 3.4% year-over-year, down from June's 3.5%, while core CPI cooled to 2.5%, its lowest level since February.
CME Group's FedWatch tool shows a 66% chance the Federal Reserve keeps rates unchanged at its September FOMC meeting, up from 50% previously.
Most major U.S. stock indexes rose, though most tech stocks, including the Magnificent Seven, lagged; Nvidia gained 3% while Alphabet declined.
Gold slipped below $4,400 an ounce after hitting a ten-week high, and silver fell below $65 after a seven-week high, with investors cautious ahead of producer inflation data.
Brent oil trades around $87 amid continued disruption around the Strait of Hormuz, and experts warn high oil prices could complicate the Fed's inflation and rate decisions.
- Who
- The U.S. Federal Reserve's FOMC and policymakers, along with economists and analysts such as Bill Adams (Fifth Third Commercial Bank), Jeffrey Roach (LPL Financial), Kyle Rodda (Capital.com), Artem Bakushev (Monaxa) and Nic Puckrin.
- What
- Financial markets reacted to the July CPI report showing cooling inflation, raising expectations that the Fed will hold interest rates steady in September, while gold and silver prices slipped.
- Where
- United States financial markets, with oil-market developments tied to Iran and the Strait of Hormuz.
- When
- Following the July inflation report, in the weeks ahead of the FOMC meeting on September 15-16.
- Why
- Softer inflation data reduced the perceived need for an interest-rate hike, though oil price uncertainty and hawkish Fed members keep the September rate decision in question.
Hold Rates Steady
Raise Rates
September rate decision
Hold Rates Steady
Cooling July CPI and softer jobs data support the Fed holding rates steady at its September meeting; most economists see this as the baseline scenario.
Raise Rates
An increasing number of hawkish FOMC members could convince the majority to implement a hike, and uncertainty about the Fed's reaction function keeps the risk of a September hike alive.
Oil prices and the Iran conflict
Hold Rates Steady
Inflation is expected to improve by the end of the year and overall risk sentiment is positive, allowing the Fed to keep rates unchanged.
Raise Rates
If the situation in Iran remains volatile, oil prices won't come down to manageable levels, making it very hard to tame inflation without raising rates.
Trading off jobs and inflation
Hold Rates Steady
Friday's jobs numbers combined with subdued inflation lend themselves to the Fed holding rates in September, which is good for Wall Street and precious metals.
Raise Rates
The Fed is in a difficult bind: it can't cut to save the cracking labor market without fueling inflation, and hiking to tame prices risks pushing the jobs market over the edge.
Key facts
- July CPI (year-over-year)
- 3.4%, down from June's 3.5%
- Core CPI (year-over-year)
- 2.5%, down from 2.6%; lowest since February
- Chance of Fed holding rates in September (CME FedWatch)
- 66%, up from 50%
- FOMC meeting dates
- September 15-16
- Gold price
- Below $4,400/ounce on Thursday after a ten-week high
- Silver price
- Below $65/ounce on Thursday after a seven-week high
- Brent oil price
- Around $87
- Previous FOMC vote for a rate hike
- 3 of 12 members
Quotes
Jeffrey Roach
Chief Economist for LPL Financial
“The July CPI report narrowly meets the bar to nudge the Fed toward holding rates steady at their next meeting in September. Fed policymakers signaled in July that core inflation would have to improve between now and then for them to refrain from raising interest rates. The Fed will also see the August CPI reports among a number of other data releases, so the CPI is not the final word.”
financialexpress.com
“Our baseline is the Fed holds rates steady, but an increasing number of voting members are hawkish and could convince the majority to implement a hike. Overall risk sentiment is positive as inflation is expected to improve by the end of the year.”
financialexpress.com
Kyle Rodda
Senior Financial Market Analyst at Capital.com
“The CPI numbers were basically as expected and showed the underlying inflation impulse in July was quite subdued. When coupled with Friday’s jobs numbers it lends itself to the Fed holding rates in September. That’s good for Wall Street; precious metals ought to respond positively too.”
financialexpress.com
Sources
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