Core US CPI YoY (%)
So, what did I miss?
The dollar remained well positioned over the past week as traders agreed to price in the Fed’s 25 basis point interest rate cut for November now. The soft landing scenario seems more and more certain every day.
The odds of a 25 basis point rate cut for next month are around 85% and traders have completely eliminated pricing in the 50 basis point move. This comes after the much hotter jobs report on Friday last week, of course.
So, what’s next?
On the agenda today, there is the US Consumer Price Index report. The current backdrop is that inflation has not been in much focus over the past two-three months. The deceleration in inflation continues to take hold, but there are some bumps in the way.
The main focus has shifted towards the labor market and how the US economy is holding up. So far, it’s not as bad as feared at the end of July or early August. The dollar benefits from this, but keep in mind that there is also a long-term con for the dollar.
Coming back to inflation, today’s numbers shouldn’t offer much. This is if they match the estimates. Core annual inflation is expected to remain at 3.2% while headline annual inflation is expected to fall to 2.3% – down from 2.5% previously.
As long as inflation does not rise again, it justifies the Fed to continue cutting interest rates at successive meetings. The only question will be the pace of interest rate cuts instead.
Hence, barring any upside surprises, today’s report should justify the market’s pricing in a 25 basis point move in November.
And that’s pretty much the state of the game as we enter the second half of the week.
This would keep the dollar on a firmer footing while keeping stocks in a stable position as well. The latter continues to spin the narrative no matter what, and that seems to be something you can count on since the end of last year.
All that being said, don’t watch the bond market. 10-year Treasury yields may be seeing a strong rebound recently but are rising against their 100-day moving average near 4.065% currently:
Daily chart of 10-year US Treasury yields (%)