NEW YORK, Sept 11 (Reuters) – U.S. consumer prices accelerated in August as the cost of gasoline rebounded after two straight monthly declines, bolstering market expectations that the Federal Reserve will raise interest rates next week.
The Consumer Price Index increased 0.4% last month after edging up 0.1% in July, the Labor Department’s Bureau of Labor Statistics said on Friday. In the 12 months through August, consumer inflation advanced 3.4% after rising by the same margin in July.
Economists polled by Reuters had forecast the CPI increasing 0.4% over the month and climbing 3.4% year-on-year. Excluding the volatile food and energy components, the CPI rose 0.3% last month, compared with an expected 0.2% increase. The so-called core CPI increased 2.4% year-on-year in August after rising 2.5% in July.
MARKET REACTION:
STOCKS: U.S. stocks rose following the slightly stronger than expected core CPI reading, with the Nasdaq and the S&P 500 up 0.8%.
BONDS: Bond prices rallied after initially declining. The U.S. two-year yield
FOREX: The dollar was flat, with the U.S. dollar index at 99.06.
RATE EXPECTATIONS: Market odds on a rate increase at the Fed’s meeting next week rose to 82% after earlier touching 90%. Before the report the market was placing 68% odds on a Sept. 16 rate hike.
COMMENTS:
ADAM SARHAN, CEO, 50 PARK INVESTMENTS, NEW YORK:
“The market is breathing a collective sigh of relief because consumer price index inflation today did not go above expectations or soar. If inflation was a lot higher than expected, that would be a problem for the Fed. The fact that inflation matched expectations gave the market the ability to take a sigh of relief. Any data that suggests the Fed will not have to raise rates or shows inflation matching or coming in lower than expectations rather than higher than expectations, is going to be considered a really bullish and good data point. “I think they’re going to hold rates steady and see how it goes. Oil prices are high, so the next inflation report is going to show inflation is higher because oil prices and food prices went up too. If you look at corn, soybeans and wheat futures markets, they’re all up. The Fed is likely to stay data dependent and monitor the situation because higher energy prices and higher food prices act as an indirect tax on consumers and businesses.”
DENNIS DICK, FOUNDER AND MARKET STRUCTURE ANALYST AT TRIPLE D TRADING, BARRIE, ONTARIO: So, when we see oil down significantly, that’s a relief for the markets because we have been running and running and running on oil and having a little bit of a pullback, three and a half percent pullback here this morning at least on the US. So, I think markets are applauding that. So that is probably the reason for the rally (interest rate hike) is not so much even the CPI data, but the weak oil. September hike looks like it’s going to be a done deal. It looks like we’re going to go up in September. At least right now, unless something drastically happens between now and next week’s Fed meeting. If we start to get some relief, on oil, where oil could actually come back in a little bit here, the markets probably rally back to new all-time highs by the end of the year. We’ve set up well, as long as you know this oil price doesn’t continue to go higher from here. If we can get an oil pullback here, this market, you know, it’s probably going to be fine.
SKYLER WEINAND, CHIEF INVESTMENT OFFICER, REGAN CAPITAL, DALLAS:“Friday’s CPI print was in-line with expectations, but inflation is still too hot, and the Federal Reserve’s hands are tied. A rate hike next week is all but assured. Consumer prices are going in the wrong direction and remain significantly higher than the Fed’s 2% target. We may see several rate hikes over the coming months in an effort to get short-term interest rates in line with where the market is pricing yields.”
TIM HOLLAND, CHIEF INVESTMENT OFFICER, ORION, OMAHA, NEBRASKA:
“The good news is the August CPI print was in line with expectations; the bad news is it was well above the Fed’s long-term inflation target of 2%. Our best guess is Wall Street will breathe a sigh of relief at the print — the September narrative has been all about inflation and the print could have been worse. Plus, bond yields have already moved up, as investors price in the probability of interest rate hikes into year-end. We do think the stock market can manage through a higher yield and rate environment, as long as earnings growth remains robust. Now, all eyes turn to the Fed and its meeting next week.”
ANGELINE ONG, SENIOR TECHNICAL ANALYST, IG, LONDON:”The expected tick higher in monthly core inflation leaves the Fed on a potential course to hike rates next week. It is still not a 100% certainty, and Warsh already has form in marching everyone up the hill only to march them back down again, but it doesn’t help the dovish argument for next Wednesday. Almost inevitably we have seen some ‘sell the rumour, buy the fact’ in equities, so with a hike rapidly being priced in the question for next week is more about any hints that there will be more than one hike by year-end, or if this is a one-and-done.”
SHAWN SNYDER, ECONOMIC STRATEGIST, POTOMAC FUND MANAGEMENT, BETHESDA, MARYLAND:
“Thus far, the Fed has simply stared at inflation with its withering gaze. Today’s report will probably change that.
“It may not be enough to definitively push the Fed to hike rates at its September meeting, but with oil prices hovering around $100 a barrel, it is hard to envision the inflation outlook getting much better in the near term.
“There were some uncomfortable details beneath the headline. Services inflation excluding housing, often referred to as ‘supercore’ inflation, rose from 2.8% in July to 3.0% in August. This lends itself to the narrative that inflation remains too ‘sticky’.
“That is probably not the report the Fed was hoping to see.”
ALEXANDRA WILSON-ELIZONDO, GLOBAL HEAD AND CO-CHIEF INVESTMENT OFFICER OF MULTI-ASSET SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK:
“Today’s CPI came in broadly as expected, which on the surface is the outcome investors were hoping for, but it does make next week’s rate decision a jump ball. The challenge is that the data does not fully capture some of the inflation pressures that have emerged more recently, and there is little evidence to suggest inflation is returning to target in the near-term.
“The survey period predates the latest move higher in energy prices, with Brent crude climbing above $100 as tensions around the Strait of Hormuz persist. It also comes before commodity strength broadened beyond energy into areas such as metals and agriculture.
“A clean inflation print today does not eliminate the possibility of stronger price pressures down the road. An in-line print keeps the Fed in play without forcing its hand, which is why investors are likely to remain focused on Warsh’s communications, or lack thereof, energy prices, labor market data, and what comes next rather than what was released today.”
KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH:
“I am not convinced the Fed will raise rates next week, though the decline in year-over-year hourly wage growth may point to an increased likelihood of a rate move between now and the end of the year. But I remain unconvinced that’s going to happen next week.
“Today’s numbers are not enough to make investors run scared for the exits. We’re going to see a positive day for equities. A lot of that stems from what was, in my view, an overly reactive negative move yesterday.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
“Headline CPI is more noise than signal, but even the signal from core is telling us that inflation is moving the wrong way. Core inflation in June was 0% m/m, then 0.2% in July, and then 0.3% in August. It doesn’t require sophisticated statistical techniques to see that this isn’t the trajectory the Fed wants.”
JOE SALUZZI, PARTNER, CO-FOUNDER AND CO-HEAD OF EQUITY TRADING AT THEMIS TRADING, CHATHAM, NEW JERSEY:
“I think they look pretty much in line; it was slightly different, but that to me is an inline print, which will probably not satisfy anybody, whether you’re bullish or bearish. I think overall, certainly those numbers are still stubborn. You’re still seeing it over 3% and we’re going to continue seeing that. I don’t think there’s any change coming forward.
“The bond market doesn’t like it, hasn’t liked it for weeks now. And we’ll see what the Fed does. But my opinion is I don’t think the Fed will raise rates this month. I think they’ll continue to say that they’re watching and keeping an eye on things. But It does not warrant hike as of it at this point. And I do think that the Fed is going to start to signal that they’ll look at maybe different measures and different metrics to really judge what they think inflation is, as opposed to the traditional lines of CPI and PCE and those types of things. But I don’t think there’s enough here.”
ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH IN FAIRFIELD, CONNECTICUT:
“Everybody right now knows that inflation is a concern and this number, along with the jobs report, probably it has the market thinking that the Fed is going to raise interest rates as soon as next week. And if not next week, definitely in October. Inflation is a problem because the president started this war with no end game in sight. I don’t see a great environment for the stock market.
“Yeah, I do (expect an interest rate hike next week). I don’t see it as being a good move. I’d argue not to do it, not because I don’t see inflation as being a problem, but because it’s not going to solve the problem of supply for oil.
“In order to really solve this inflation problem, you have to really sort of scale back the overall economy, which means it’s going to be a lot more than 25 basis points…. and that’s going to be a whole hiking cycle. And I don’t see the Fed willing to do that. But 25 basis points just puts another scare into the overall market, along with the problem that we have with the amount of debt that the country has.”
(Reporting by Lucia Mutikani, Anand Gopal, Darshan Kumar, Laura Matthews, Ragini Mathur, P. Avinash, Tharuniyaa Lakshmi, Saeed Azhar, Chuck Mikolajczak, Utkarsh Hathi, Johann Cherian; editing by Colin Barr)
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