All eyes are on this week’s U.S. consumer price index (CPI) report, which could provide the Federal Reserve with the crucial data needed to justify an interest rate cut at its next meeting in September. Market participants are eagerly anticipating the release, hoping it will offer the Fed the ammunition to shift its monetary policy stance after a period of aggressive tightening.
However, the prevailing sentiment among traders suggests a cautious approach, with expectations of heightened market volatility. As traders position themselves, they are betting on a potential 1.2% swing in either direction for the S&P 500 on Wednesday when the CPI data is released. This anticipated movement is in line with the implied volatility projected for key upcoming dates, including Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium on August 23 and another significant event on August 29.
Meanwhile, the yield on the benchmark U.S. 10-year Treasury note has rebounded to levels seen before the latest jobs report, which had erased most of the recent sharp declines. The report showed an increase in unemployment for the fourth consecutive month, fueling concerns that the Fed’s aggressive monetary tightening could be stifling economic growth. Labor market data, including the August jobs report set to be released just before the next Fed meeting, will be critical for traders, alongside the inflation figures. The unemployment rate rose to 4.3% last month, significantly higher than the Fed’s year-end forecast, underscoring the delicate balance the Fed must maintain between managing price pressures and ensuring full employment.
Traders are particularly focused on the core CPI figures, which exclude the volatile food and energy components. The core CPI is projected to rise 0.2% month-over-month and increase 3.2% from a year earlier, edging closer to the Fed’s 2% inflation target. The overall CPI is also expected to show a 0.2% rise from June. While these modest increases might not be enough to derail the Fed from implementing the widely anticipated rate cut next month, they will undoubtedly influence the decision-making process.
Over the weekend, Fed Governor Michelle Bowman expressed continued concerns about upside risks to inflation and the ongoing strength of the labor market, signaling her potential reluctance to support a rate cut in September. Despite this, money markets have fully priced in a rate reduction next month, with about 100 basis points of easing expected by the end of the year, according to swaps data.
In the commodities market, oil prices continued their upward trend on Monday, building on last week’s 4.5% gain. This increase comes amid reports that some of the top U.S. oil refiners are scaling back operations this quarter, heightening fears of a potential global crude glut. Conversely, gold prices traded hedging, reflecting the mixed sentiment in the broader market as investors weigh the potential outcomes of this week’s pivotal economic data.