- US CPI data showed a 3.4% annual increase, in line with forecasts.
- Data on Friday revealed that consumer spending in the US fell significantly.
- Traders are pricing a 31% chance of a Fed hike in September.
Currency futures gained on Monday as the dollar extended declines from the previous week amid a drop in Fed rate hike expectations. Economic data released last week showed easing inflation and a slower economy. Meanwhile, market participants are watching rising tensions in the Middle East with no new deal in sight.
Recent US data has painted a picture of a slower economy, leaving the Fed with little room to hike interest rates. In the second quarter, the US economy expanded by 1.5%, compared with a forecast of 2.1%. This was one of the early signs that the war in the Middle East was affecting the economy.
Afterwards, the nonfarm payrolls report revealed that the economy lost 23,000 jobs in July. This led to a drop in expectations for a Fed rate hike. Moreover, at the time, market participants hoped for a deal to pause the conflict between the US and Iran. This further weighed on rate hike bets.
Last week, US CPI data showed a 3.4% annual increase, in line with forecasts. It was slightly lower than the previous reading of 3.5%. At the same time, wholesale inflation was unchanged on a monthly basis. Economists had expected a 0.2% increase.
The soft inflation numbers also pressured bets on a Fed rate hike lower. However, experts warned that the future of inflation remains uncertain amid the war in Iran. As long as the war continues and there is no peace deal, supply disruptions will keep sending oil prices higher. This, in turn, will reflect in higher global price pressures.
US sales (Source: US Department of Commerce)
Finally, data on Friday revealed that consumer spending in the US fell significantly. Retail sales dropped by 0.6% in July, compared to expectations of a 0.1% increase.
“We are clearly having signs of poor consumption,” said Juan Perez, director of trading at Monex USA in Washington. “This evidence clearly shows that there is an economic slowdown in the United States.”
All this has caused a sharp repricing of rate hike expectations. Before the downbeat reports, traders were almost fully expecting a move in September. However, the likelihood has now dropped to 31%. Similarly, the chances of a move in December have dropped. This week, traders will assess the FOMC minutes for more clues on policy moves.