Sticky Inflation Persists, Geopolitical Chokepoints Under Threat

The U.S. Bureau of Labor Statistics released its latest August Consumer Price Index (CPI) report last Friday. The August CPI rose 0.4% month-on-month, a significant widening from 0.1% in July, mainly driven by energy prices. Gasoline prices rose 3.9% month-on-month, with this single item contributing more than one-third of the overall CPI increase for the month. Core CPI rose 2.4% year-on-year, down from 2.5% in July and in line with expectations. However, it rose 0.3% month-on-month, above the market expectation of 0.2% and the highest since May this year, indicating that short-term inflationary pressure remains.

Because the month-on-month core CPI reading came in above expectations, market odds of a 25-basis-point Fed rate hike in September have approached 90%. Several former Fed officials also warned that a single 25-basis-point hike is almost impossible to solve the inflation problem, possibly hinting that another hike could still come in December. Spot gold briefly plunged after the CPI release, at one point falling below the $4,300 mark, but then rebounded quickly, reaching a high above $4,380. The market has already priced in expectations of a September Fed rate hike. Unless the Fed delivers more hawkish, aggressive rate-hike rhetoric at this week's policy meeting to suppress energy-driven inflation, either a hike in line with market expectations or keeping rates unchanged would be favorable for gold to bottom out and rebound. Resistance level would be at $4,400–$4,500; support level would be at $4,300–$4,260.

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In international crude oil, amid a significant escalation in tensions between Yemen's Houthi armed group and Saudi Arabia, Brent crude briefly touched $108 per barrel. The Houthis seized Mayyun Island in the middle of the Bab el-Mandeb Strait. The island covers about 13 square kilometers and lies along one of the world's most important maritime routes. As shipping through the Strait of Hormuz has been disrupted by the U.S.-Iran conflict, the importance of the Bab el-Mandeb Strait has risen further. The Houthis' actions have led Saudi Arabia to shut down its key east-west oil pipeline as a precaution. The pipeline has recently transported 4 million to 5 million barrels of crude oil per day, accounting for 4% to 5% of global supply. If these two shipping chokepoints, the Strait of Hormuz and the Bab el-Mandeb Strait, remain blocked, Brent crude could rise further to $120 or higher.