Markets are ‘sitting tight’ ahead of the release of US inflation gauges, knowing that the extent of any upside surprise could tilt expectations towards a potential November hike. The impact of rising energy costs is likely to be illustrated by a jump higher in the August CPI print. If inflation takes a step higher this will highlight the challenge faced not only by the Fed but by central banks around the globe – that inflation can rear its ugly head again at inopportune times.
So, all indications are that higher oil costs are going to influence the headline inflation print. Perhaps after stripping out the volatile food and energy impacts, the Core CPI will offer some solace Though if we happen to see any rises in the Core data this could really put markets on edge given the possible interest rate implications. Investors will also have PPI data to sift through this week in addition to the CPI numbers. Therefore, it’s fair to say there is quite a bit riding on the inflation data this week, with the outcome due to shift expectations from the FOMC in November one way or the other.
Speaking of oil, the WTI contract is making an approach towards the $90 per barrel level, with rosy demand outlooks from OPEC and the IEA combined with supply constraints underpinning the price. If we see a hot US CPI print this has the potential to at least slow the momentum in the oil market, on expectations of higher interest rates denting demand. And after a strong run higher this week, a shallow pullback in the oil market is not out of the question with the technicals showing signs of over-extension. But overall, the supply and demand dynamics hint at potential further upside in the oil market. Particularly with OPEC+ effectively controlling the taps, so to speak.
In FX, comments by BOJ governor Ueda over the weekend concerning negative interest rates possibly coming to an end did not have a lasting effect, with the USD rising against the Yen. However, the DXY is still below the 105 level, with markets in a waiting mode ahead of the US inflation data. The result of the inflation data will likely dictate the direction of both treasury yields and the USD, from which other assets will take their cues. Gold being one of them. The bounce in the USD pushed gold back below resistance around the $1922 region, and any upside surprises in the US inflation data could have gold again being pressured below the $1900 level. On the flip side, if the energy price impact is not as great as feared in the data, could see a pullback in yields and a path opened higher for gold.
For now, US inflation data is what markets are awaiting before attention later in the week turns to a raft of Chinese economic gauges due for release on Friday, which could also influence risk appetite to round out the week.