Wild Volatility Following US CPI

Yesterday was a wild day for markets with the latest US CPI release causing wide-spread volatility. The headline annualised reading came in at 8.3%, above forecasts for an 8.1% reading, though still down on the prior month’s 8.5% reading. So, the takeaway here is that inflation cooled again in August, though following the sharp drop in July, the decline was not as pronounced. Moreover, the monthly readings were both seen beating forecasts and rising against prior results. Headline m/m US CPI rose 0.1%, beating forecasts for a 0.1% drop and marking an increase on the prior month’s 0% reading. Likewise, core CPI was seen jumping 0.6%, double both the forecast and prior 0.3% reading.

Core CPI Jumps

Looking at the breakdown of the data, groceries and housing costs were both seen higher, rising 13.5% and 6% respectively on the month, while medical costs were also up at 5.6%. Energy costs, which had been a big driver of the inflationary spike over the first half of the year, were seen cooling again last month with prices now down around 10% from the peak going into July.

Perhaps the most concerning aspect of the data, and that which caused most volatility, was that the larger jump came in core-CPI. With more volatile elements stripped out, core CPI is usually at a lower level than headline CPI, this shows that certain elements of rising price pressures have become entrenched elsewhere in the economy, suggesting a harder road ahead for the Fed.

Fed Rate Hike Expectations Soar

On the back of the data, market pricing for the September FOMC has shifted firmly to the hawkish side. The market is now fully pricing in a .75% hike, with around a 40% chance of an even larger 1% hike. Given that at the start of last week, pricing was split between a .5% hike and a .75% hike, this reflects a sharp shift in sentiment.

USD Up, Equities Down

The market reaction has seen USD firmly bid across the board while risk markets have come crashing down. Equities and commodities prices have plunged on the back of the meeting, as have risk-linked currencies. Safe-havens have seen a surge of fresh demand, however, with JPY the biggest beneficiary of the post-CPI moves so far.

Technical Views


The latest failure at the test of the bear channel top has seen the NASDAQ turning sharply lower with price moving back below the 12220.22 level. The market is now close to testing the September lows and, with momentum studies bearish here, the focus is on a further push lower towards the 111540.72 level next