August inflation data spurs risk-off sentiment in markets
Summary
The latest U.S. CPI reading came in higher than economists expected last Tuesday, leading to sell-offs in equity markets and a resurgence of recessionary fears as the next FOMC meeting approaches.
Inflation data
The U.S. CPI reading for August came in at 0.1% MOM and 8.3% YOY, higher than the projected -0.1% and 8.1%, respectively. The key drivers of price increases were rent, food, and healthcare, which effectively offset the impact of declining gas prices. Economists originally projected a month-over-month decline after July’s reading broke a steady upward trend in prices. Instead, it seems possible that inflation will plateau or even resurge without continued hawkish policy measures from the Federal Reserve.
Upcoming FOMC meeting
The FOMC will release its next decision on interest rates this Wednesday, with markets anticipating a 75-basis-point hike, especially after the August CPI reading. If CPI had come in lower, it’s possible that expectations would have shifted to only a 50-point hike, but now it seems likely the Fed will match the 75-point hikes it executed in June and July. Powell and other committee members continued to express hawkish sentiment as the meeting draws nearer.
Rate hike implications
Markets have already reacted to the anticipated rate hike from the Fed on several fronts. The S&P dropped more than 6% last week, as high inflation and the prospect of further monetary tightening introduced risk-off sentiment in markets. The rising rate environment has meanwhile helped to bolster the U.S. dollar, with the dollar index near 20-year highs. In housing and commodity markets, expectations of higher mortgage rates and reduced macroeconomic demand put downward pressure on prices.
The week ahead
All eyes will focus on the FOMC this week as markets anticipate another 75-basis-point hike. There will also be data on housing starts and existing home sales early in the week, with economists anticipating demand weakness due to rising mortgage rates.
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