Morning Commentary:“Inflation Pressures Remain Muted” – Not So Fast!

Foreign Exchange - Morning Commentary

“Inflation Pressures Remain Muted” – Not So Fast!

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today’s headline is a direct quote that Fed Chairman Powell delivered yesterday prior to his semi-annual appearance before Congress; he will go before the Senate later this morning. This quote, combined with other testimony he gave, helped pave the way for sharply lower U.S. interest rates yesterday as the market is once again anticipating with nearly 100% certainty that the Fed will cut interest rates at the next FOMC meeting on July 31.
In his testimony yesterday, Chairman Powell discussed the persistent undershooting of inflation relative to the Fed’s target of 2%, the fact that a number of factors were “transitory”  and expectations for inflation to eventually move up to the 2% area. While one month’s CPI will not change the market dynamics very much, today’s release of June CPI is a reminder that inflation is still lurking around in the background.
Headline June CPI came in fractionally higher than expectations at 0.1%, but underlying CPI (ex-food and energy) rose by 0.3% which is the sharpest increase in nearly 18 months. CPI, ex-food and energy, rose from 2.0% to 2.1% YoY while CPI overall declined from 1.8% to 1.6% YoY. The higher inflation is not a game changer for the market regarding Fed action on July 31 but is a reminder that while inflation has been largely benign, it is not dead and still skulks in the shadows.
The net reaction by the markets is that U.S. interest rates are fractionally higher and lag behind sharply higher EZ interest rates today. Global equities are generally in the green, and U.S. equities are scheduled to open fractionally higher. The U.S. dollar (DXY) is generally weaker again today but is correcting higher since the release of the CPI. Chairman Powell will be appearing before the Senate later this morning, and U.S. PPI comes out tomorrow morning.
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