Commerzbank’s Christoph Rieger argues that US CPI and Fed Chairman Warsh testimony will shape Fed expectations over the summer, with markets currently pricing in a roughly 50/50 chance of a hike in July and more than 25 basis points by September. The bank recognizes the risk of rounding up the core CPI, but doubts whether the latest Monetary Policy Report presents a template for an inevitable enhance in interest rates.
CPI and testimony to run the Fed
“Rates: Today’s US CPI readings and Warsh statement could set the Fed’s course for the summer. We see risks of rounding up on a key underlying figure, but there are still opportunities for front-end stabilization after these numbers.”
“All eyes will be on the United States today, where it looks like CPI numbers, followed by Warsh’s testimony, will shape Fed expectations throughout the summer before France faces Spain in the World Cup semifinals in Dallas. Volatility appears guaranteed after Waller highlighted the importance of the data, with the market pricing in a 50/50 chance of a rate hike this month.”
“We can safely expect headline inflation to fall thanks to lower gas prices. The key number will be the rise in the core index. The consensus and our economists are expecting +0.2%. There is a risk that this number will be rounded up to 0.3% (our economists would bet on 0.23%). However, with the World Cup in mind, an increase of 0.2% would probably be good news – and if we get a higher number, it will be important to determine whether this was due to the components, such as accommodation, transport and restaurants.”
“However, we do not believe the latest report provides a template for an imminent enhance in interest rates. It is worth noting that, for the first time in years, the report describes wage growth as ‘roughly consistent with 2% inflation over time’ thanks to powerful productivity growth.”
“Forwards currently discount the probability of a 25 bp rate hike this month (two weeks from now) at 46%, and over 25 bp by September. Unless today’s CPI indicators show an unexpected enhance in core inflation pressure unrelated to the World Cup, chances are good that Warsh will not signal an imminent interest rate enhance.
(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor. Find out more.)
