- Annual US consumer inflation came in higher than expected at 3.7%.
- Fed policymakers have maintained the outlook for just one more hike this year.
- Developments in the Middle East this week have caused a surge in oil prices.
Interest futures jumped on Thursday despite upbeat US inflation and sales data as Fed officials maintained the central bank would hold in October. As a result, the dollar and Treasury yields pulled back while interest futures jumped.
Market participants have digested a set of pivotal reports from the US this week, including CPI, PPI, and sales numbers. Annual consumer inflation came in higher than expected at 3.7%. Meanwhile, the monthly figure met forecasts at 0.6%.
At the same time, wholesale inflation increased by 1.3% on a monthly basis, compared to the estimate of 0.6%. The upbeat numbers indicate hot price pressures that will force the Fed to tighten monetary policy.
A separate report revealed robust consumer spending in the economy despite the impact of the war in Iran. Sales increased by 0.8%, above the forecast of 0.3%. This gives the Fed yet another reason to maintain a hawkish outlook. If the economy is on solid ground, then there is enough room to increase borrowing costs without causing a recession.
Nevertheless, policymakers have maintained the outlook for just one more hike this year. Initially, market participants increased the likelihood of an October hike to 54%. However, after remarks from top officials, it is clear that the central bank will hold rates this month. Consequently, the rally in yields could pause until another catalyst emerges.
Moreover, experts believe yields are pulling back because the market has already priced in the Fed’s hawkishness. Therefore, any upbeat data only confirms expectations.
“The hotter (producer prices) print reinforces the inflation concerns raised by CPI, but our view remains that much of the associated Fed hawkishness is already priced in, leaving limited room for further upside in US yields and the dollar,” said Joel Kruger, a market strategist at LMAX Group in London.
Elsewhere, developments in the Middle East this week have driven up oil prices. Tensions between the Houthis and Saudi Arabia have escalated with the former attacking several targets in the oil-producing country. Moreover, there were reports of an attack on a ship in the Strait of Hormuz, rekindling supply concerns.
Meanwhile, Iran announced that it would soon start attacking US warships. Nevertheless, the rally in oil had little impact on yields and interest futures.
