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North American Morning Briefing: Post-CPI Mood Still Bright Despite Fed Officials' Caution

MARKET WRAPS

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Producer Price Index for July; Weekly Jobless Claims

Opening Call:

Stock futures rose on Thursday, potentally pushing the major indexes to their highest in three months, as hopes that inflation may have peaked continued to power the risk asset rally.

Hopes that the pace of price rises has hit a peak encouraged investors to believe the Federal Reserve can be less aggressive in hiking borrowing costs and that consumer confidence can improve.

"The softer than expected inflation reading pushed the market odds narrowly back in favor of a +50 basis point Fed hike in September...and delivered a significant boost to long-duration assets," said Ian Williams, economics and strategy research analyst at Peel Hunt.

Alex Pelle, U.S. economist at Mizuho, said in a note to clients: "We do have some very preliminary evidence that inflation may be taking a step down from an underlying pace around 8% to the something closer to the 5% level. This is a level that will still keep the Fed hiking, but the July round of data--taken as given--gives the bulls an early win."

Fed officials, however, were quick to note that inflation remains "unacceptably high." Chicago Fed President Charles Evans said he expects the central bank "will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective."

Jeffrey Roach, chief economist at LPL Financial said the Fed "still has a lot of work to in tightening financial conditions," and that inflation "is clearly still the primary concern for policy makers."

But Roach said that as inflation slows the Fed could revert to raising rates by 0.5 a percentage point at its next meeting in September. Ahead of the inflation print on Wednesday, Fed watchers were forecasting the central bank would raise rates for the third straight time by 0.75 a percentage point.

"Traders are growing confident that if the next inflation report on Sep. 13 confirms this softening pricing pressure trend, the Fed may seriously consider a smaller pace of tightening," said Edward Moya, senior market analyst at Oanda.

"It is too early to say that the Fed will only raise rates by a half-point in September, but if inflation keeps on cooling sharply the Fed's dovish tendencies will return."

Forex:

The dollar continued to lose ground in Europe after it slumped on Wednesday, with the ICE Dollar Index down by the most since June and earlier in the day had traded at its lowest levels since March 2020.

Evidence that price pressures might have peaked could convince the Fed to deliver smaller interest-rate rises, said Ebury.

"At the time of writing, markets are now pricing in not much more than a one-in-three chance of a 75 basis point rate increase at the Fed's September meeting, down from almost 70% prior the inflation number."

Bonds:

Bond yields barely moved in Europe, after they fell on Wednesday as investors increased their bets on a less hawkish Fed next month, reducing the inverted spread to its lowest point in five days.

But some pundits warned it is too early to call victory over inflation. Amherst Pierpont said that CPI analysis by the Cleveland and the Atlanta Fed show inflation's underlying trend well above target. PPI due later Thursday is forecast to slow down, and jobless claims are expected to be slightly higher.

Asset manager Louis Navellier said that concerns for an even more hawkish Fed are easing, which is "best reflected by the shift in expectations for the next Fed increase in September from 75bps to 50bps, with 50bps now considered a 2/3 likelihood from 1/3 before the CPI numbers."

Energy:

Oil prices turned higher after the IEA said that demand would be stronger than expected due to increased power generation.

The agency said heatwaves were driving more demand for electricity to power fans and air conditioning units. With natural gas prices so high and supplies scarce, power plants--particularly in Europe--were switching to oil as an alternative fuel source.

The IEA raised its demand forecasts for 2022 by 500,000 barrels a day.

Read: European Heatwaves Boost Demand for Oil, IEA Says

Read: European Natural Gas Prices Rise as Rhine River Levels Pose Fresh Bottleneck

Metals:

Base metals were higher in Europe while gold dipped, with investors more confident about the global economy following the latest U.S. inflation data.

"Investors are gaining confidence that the Fed finally has inflation under control," Peak Trading Research said, adding that risk assets like commodities were now more appealing.

   
 
 
   
 
 

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August 11, 2022 05:32 ET (09:32 GMT)

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