US CPI key as markets weigh up 50bp cut chances

Mainland European equities are leading the way in early trade, with the FTSE 100 lagging behind amid declines for heavyweights AstraZeneca, Unilever, and GlaxoSmithKline. Nonetheless, there is a relatively positive tone in play despite a downbeat Asian session that saw the Nikkei 225 lead the way lower with a 1.5% decline. A raft of data out of the UK has seen GDP underwhelm, with the 0% July figure disappointing thanks to weak industrial, manufacturing and construction metrics. Nonetheless, the recent strength of the pound highlights a relative confidence and stability in the UK going forward, and the three-month average GDP figure of 0.5% does continue the upward trajectory seen throughout 2024 thus far. With this month marking the seventh month without a negative growth reading, this stands as the longest period of stability since 2017.

Hawkish comments from the typically dovish BoJ member Nakagawa led Japanese stocks lower and the yen higher overnight, raising concerns around a resurgence of carry trade concerns going forward. Yesterday saw BoJ ‘sources’ cast doubt over the likeliness of a rate hike from the bank this month, but Nakagawa has made it abundantly clear that we should expect to see further tightening as we move forward. With Japanese rates at rock bottom, the normalisation of policy has helped drive USDJPY into a 2024 low given the hotly anticipated Fed rate cut due in a week. Arguably, it is the sharp reversal of the Yen carry trade that could be front and centre of Fed concerns when weighing up whether a 50-basis point hike would be appropriate. With USDJPY now highly correlated with US stocks, the hawkish BoJ outlook could create a somewhat perverse situation where the long-anticipated Fed pivot actually leads stocks lower thanks to a weaker USDJPY.

Today will undoubtedly see markets turn their attention to the US, with the latest CPI inflation likely to provide the most important event remaining before the Fed cut rates next week. Base effects should effectively guarantee a notable decline this month, with markets looking for a slump in headline CPI from 2.9% to 2.6%. However, with energy prices heading sharply lower over the course of August, there is a hope that we could yet see a move back into the 2.5% region. Core inflation remains an issue, with the lofty 3.2% figure expected to remain in place. Nonetheless, the bank appears ready to act, and the decline for CPI to potentially match the current core PCE figure of 2.6% should help further the cause for a dovish Fed. The question for today is whether markets deem a 50-basis points cut as being more or less likely in response to the data, although the risk of a USDJPY carry trade led sell-off may yet restrict the Fed to a 25bp move next Wednesday.