US Inflation Surge Hits Stocks, Bonds

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In a surprising turn of events, the U.Sinflation rate has registered a rebound in August, marking a significant rise in consumer pricesDespite this uptick, the core Consumer Price Index (CPI) has seen a decline for six consecutive months, indicating a complex economic landscapeUpon the release of this data, the dollar index surged briefly, while Treasury yields faced pressure, and the stock market opened on a high note.

On the evening of September 13, as per the latest figures released by the U.SDepartment of Labor, it was reported that the seasonally unadjusted CPI in August increased by a notable 3.7%. This marks the highest level since May of this year, showing a second consecutive month of growth

Additionally, the month-over-month CPI growth accelerated from 0.2% in July to 0.6% in August, representing the largest monthly increase seen in 14 months.

However, the core CPI, which excludes the volatile food and energy sectors, has been on a downward trajectory for six months nowSpecifically, the unadjusted core CPI year-over-year growth in August fell from 4.7% in July to 4.3%, consistent with market expectations, and marking the lowest level since September 2021. Month-over-month growth also saw a slight increase from 0.2% to 0.3%.

Following the publication of this data, there was a noticeable spike in the dollar index, which rose by over 20 points, reaching 104.98. Meanwhile, spot gold prices dipped by nearly $9, landing at $1906.49 per ounce

Subsequently, U.STreasury yields increased, with the yield on the 10-year Treasury climbing by 7.20 basis points to 4.336%. The yield on the two-year Treasury also rose by 4 basis points, reaching 4.314%. Despite this initial rise, the stock market exhibited volatility, with the Dow Jones dropping by 0.09%, the Nasdaq by 0.15%, and the S&P 500 by 0.11% by the time this report was prepared.

Inflationary pressures have been primarily fueled by energy prices, amidst concerns over the recent actions taken by the Federal ReserveIn fact, inflation in the U.Shad reached a staggering peak of 9.1% in June of the previous year, but this was followed by a consistent decline resulting from the central bank's aggressive interest rate hikes.

The Department of Labor stated that the increase in inflation for August was predominantly driven by rising gasoline and housing prices

According to the U.SEnergy Information Administration (EIA), gasoline prices surged sharply in August, peaking at $3.984 per gallon in the third weekThis increase greatly impacted the overall CPI, which climbed to 3.7% in August.

Moreover, economists warn of upward inflationary risks; for instance, should strikes within the automotive industry prolong beyond a month, supply chains could be disrupted, thereby driving up vehicle prices significantlyDespite these pressures, the core CPI—seen as a better indicator of underlying inflation trends—has consistently declined over the last six months, resulting in a drop from a 40-year high of 6.6% a year ago to current levels still exceeding the Federal Reserve's target of 2%.

Florian Ielpo, an analyst at Lombard Odier Asset Management, commented that the market has finally received the long-anticipated inflation report

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He noted that this was a significant report indicating a normalization of service sector inflation, allowing the Federal Reserve to approach the situation with a greater sense of comfort, particularly as the uptick in inflation is attributed to fluctuations in energy prices, which shouldn't cause undue alarm at this point.

Brian Jacobsen, Chief Economist at Annex Wealth Management, pointed out that the rise in the overall inflation rate is somewhat misleading since it is primarily driven by a sharp 10.5% increase in energy commodity pricesMeanwhile, Peter Cardillo, Chief Market Economist at Spartan Capital Securities, remarked that the core inflation rate has not risen, nor has the improvement trend disappeared; he anticipates a muted negative reaction from the market regarding the report.

As a result, it seems likely that the Federal Reserve will maintain its current position for the time being, opting to wait and observe how the recent interest rate hikes will affect economic performance going forward

In the last 12 policy meetings, Federal Reserve officials had raised rates in 11 instances, with the most recent hike occurring in July, bringing the interest rate to a range of 5.25%-5.5%, the highest level seen in 22 years.

The consensus among Federal Reserve officials appears to be leaning toward keeping rates unchanged during the meeting scheduled for September 19-20, allowing for more time to evaluate the impact of rate increases on the economy.

According to the latest data from CME’s FedWatch Tool, there is a 91% probability that rates will remain at 5.25%-5.50% in September, with only a 9% likelihood of an increase to 5.50%-5.75%. As we approach November, there is a 56.1% chance that the rates will stay unchanged, compared to a 40.4% chance they will increase by 25 basis points, and a mere 3.4% probability of a 50 basis point hike.

Kim Forrest, Chief Investment Officer at Bokeh Capital Partners, expressed that the acceleration of core inflation has disappointed investors