Main Topic: U.S. inflation and the Federal Reserve's efforts to control it.
Key Points:
1. U.S. inflation has declined for 12 straight months, but consumer prices increased 3% year-on-year in June.
2. The Federal Reserve aims to reduce inflation to about 2% and plans to raise its key federal funds rate to over 5%.
3. The Fed is concerned about high inflation due to a strong labor market, rising wages, and increased consumer spending, and aims to slow the job market to control inflation.
The recent spike in U.S. bond yields is not driven by inflation expectations but by economic resilience and high bond supply, according to bond fund managers, with factors such as the Bank of Japan allowing yields to rise and an increase in the supply of U.S. government bonds playing a larger role.
Federal Reserve Chair Jerome H. Powell stated in a speech at the Jackson Hole symposium that the central bank is prepared to raise interest rates further if needed, signaling that they do not believe inflation is fully under control. The Fed will proceed cautiously and assess economic data as they determine whether to make further policy adjustments.
The president of the Federal Reserve Bank of Philadelphia believes that the US central bank has already raised interest rates enough to bring inflation down to pre-pandemic levels of around 2%.
The dollar is expected to continue strengthening as bond yields rise, with the Fed likely to hike rates at least once more this year, and a barrage of economic data this week will heavily influence Fed policy decisions and impact the direction of the dollar and interest rates.
Asia-Pacific markets started the final trading week of August higher after U.S. Federal Reserve chair Jerome Powell said that inflation remains "too high" and that the central bank is "prepared to raise rates further if appropriate."
The latest inflation data suggests that price increases are cooling down, increasing the likelihood that the Federal Reserve will keep interest rates unchanged in their upcoming meeting.
The Federal Reserve's preferred inflation gauge increased slightly in July, suggesting that the fight against inflation may be challenging, but the absence of worse news indicates that officials are likely to maintain interest rates.
The U.S. is currently experiencing a prolonged high inflation cycle that is causing significant damage to the purchasing power of the currency, and the recent lower inflation rate is misleading as it ignores the accumulated harm; in order to combat this cycle, the Federal Reserve needs to raise interest rates higher than the inflation rate and reverse its bond purchases.
U.S. Treasury yields rose as investors assessed the impact of recent economic data and speculated on the future of Federal Reserve monetary policy.
Global equity investors are concerned about central bank policies as U.S. data shows a rise in inflationary pressures, causing markets to worry about a potential end to the Goldilocks scenario and softer labor markets.
The US dollar strengthens to a six-month high after data reveals that the services sector unexpectedly picked up steam last month, indicating inflation pressure and suggesting that interest rates will remain elevated for longer.
U.S. stock investors are closely watching next week's inflation data, as it could determine the future of the current equity rally, which has been fluctuating recently due to concerns over the Federal Reserve's interest rate hikes and inflationary pressures.
Bond traders are anticipating that the Federal Reserve will continue with interest-rate hikes, and next week's consumer-price index report will provide further insight on how much more tightening may be required to control inflation.
The main event to watch this week is the latest inflation data, which will precede the Federal Reserve's September policy meeting.
Asia stock markets are softer ahead of U.S inflation data, with investors looking for signals about the Federal Reserve's next moves on interest rates.
Summary: Stock futures are trading higher as investors anticipate the release of U.S. inflation data and consider its impact on monetary policy.
Americans are expecting high inflation to persist over the next few years, with a median expectation of 3.6% one year from now and estimates of around 3% three years from now, according to a survey by the Federal Reserve Bank of New York. This suggests that sticky inflation may continue to be a concern, as it surpasses the Fed's 2% target. Consumers also anticipate price increases in necessities such as rent, gasoline, medical costs, and food, as well as college tuition and home prices.
The Consumer Price Index is expected to show an increase in inflation in August, with headline inflation rising to 3.6% and core inflation easing to 4.4%, but the market is accustomed to this trend and the Federal Reserve is unlikely to change its rates at the upcoming meeting.
Despite a spike in gas prices, the rise in inflation appears to be easing gradually, with core prices exhibiting a slower increase in August compared to July, suggesting that price pressures are being brought under control.
Bitcoin and other cryptocurrencies experienced fluctuations following the release of U.S. inflation data, signaling a potential impact of higher interest rates on digital currencies.
Stronger-than-expected U.S. economic data, including a rise in producer prices and retail sales, has sparked concerns about sticky inflation and has reinforced the belief that the Federal Reserve will keep interest rates higher for longer.
European markets rise as global investors await the U.S. Federal Reserve's monetary policy decision; retail stocks lead gains while oil and gas dip slightly, and U.K. inflation falls below expectations in August.
Central banks around the world may have reached the peak of interest rate hikes in their effort to control inflation, as data suggests that major economies have turned a corner on price rises and core inflation is declining in the US, UK, and EU. However, central banks remain cautious and warn that rates may need to remain high for a longer duration, and that oil price rallies could lead to another spike in inflation. Overall, economists believe that the global monetary policy tightening cycle is nearing its end, with many central banks expected to cut interest rates in the coming year.
Investors are focusing on the release of economic reports on GDP and inflation as they evaluate the Federal Reserve's stance on interest rates and its efforts to cool down inflation. Metal prices have slipped due to concerns over global demand and the economy, and the risk of a government shutdown is also adding to the bearish sentiment. Earnings reports from various companies and core PCE inflation data are expected in the week ahead.
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Mounting fears of rates staying elevated for longer sent jitters through global risk assets, pushing U.S. Treasury yields to a peak not seen since the early stages of the 2007-2008 financial crisis and the dollar to a 10-month high.
Bitcoin and other cryptocurrencies are experiencing a slight increase, but the surging bond yields are causing pressure on digital assets as investors consider the impact of interest rates and Federal Reserve policies.
Government bond yields are spiking in the US, Europe, and the UK due to investors realizing that central bank interest rates may remain high for an extended period, and concerns over inflation and supply shortages caused by the retirement of baby boomers.
The U.S. bond market is signaling the end of the era of low interest rates and inflation, with investors now believing that the U.S. economy is in a "high-pressure equilibrium" characterized by higher inflation, low unemployment, and positive growth. This shift has significant implications for policy, business, and individuals, as it could lead to failed business models and unaffordable housing and cars, and may require the Federal Reserve to raise rates further to control inflation.
Federal Reserve officials are not concerned about the recent rise in U.S. Treasury yields and believe it could actually be beneficial in combating inflation. They also stated that if the labor market cools and inflation returns to the desired target, interest rates can remain steady. Higher long-term borrowing costs can slow the economy and ease inflation pressures. However, if the rise in yields leads to a sharp economic slowdown or unemployment surge, the Fed will react accordingly.
Concerns surround the upcoming release of U.S. payrolls data and how hawkish the Federal Reserve needs to be, as global markets experience a period of calm following a tumultuous week that saw Treasury yields rise to 16-year highs, crude oil prices drop, equities decline, and the yen strengthen. Japanese government bond yields are also causing concern, as investor sentiment towards the Bank of Japan's stimulus remains low.
Global markets are calmer as investors await US payrolls data, hoping for a moderation in jobs growth and less reason for the Federal Reserve to raise interest rates again, while bond yields remain steady and the dollar heads for a 12-week winning streak.
Stock markets are wavering as investors anticipate another rate hike by the US Federal Reserve, fearing its impact on the global economy, however, recent inflation data suggests that inflation is declining and consumer spending is rising.
Underlying US inflation is expected to rise, supporting the idea that interest rates will need to remain higher for a longer period of time, as indicated by central bankers.
Stocks are up and U.S. interest rate expectations are lower as a result of several Fed officials suggesting that rising yields may be helping their fight against inflation.
Rising bond yields may remove the need for the Federal Reserve to raise interest rates in November, as some investors believe, but a stronger-than-expected inflation report could change that perspective.
Investors are closely monitoring the bond market and September CPI data to determine the Fed's stance on interest rates, with Seema Shah of Principal Asset Management highlighting the circular nature of market reactions to yield spikes and their subsequent declines. She suggests that while there are concerns about upward momentum, the equity market will find comfort in a continued drop in yields and could remain range-bound for the rest of the year. Diversification is recommended as the market narrative remains unclear, and investors may consider waiting until early 2024 for greater clarity on the economy and the Fed's actions.
The U.S. government's upcoming inflation report is expected to show a cooling off of inflation, with overall prices for consumers rising by 0.2% compared to August and 3.6% compared to a year ago, and core inflation expected to be up 4.1% from September last year, indicating slower price increases in September than in August.
The upcoming monthly inflation report is expected to show that inflation in the US is cooling off, with overall prices for consumers rising by 0.2% compared to August and 3.6% compared to a year ago, indicating slower price increases in September than in August. However, if the report reveals that inflation remained higher than expected, especially in core areas, it may prompt the Federal Reserve to raise interest rates again, further slowing the economy.
The unexpectedly high U.S. producer price inflation figures may cool the recent rally in emerging market and Asian stocks, with attention turning to Indian consumer inflation and other regional economic data.
The minutes from the Federal Reserve's September policy meeting confirm that the central bank is closely monitoring data on inflation, adding significance to today's consumer prices report; the report is expected to show a marginal decrease in inflation pressures in September, which would be welcome news for the U.S. central bank, although the path to lower inflation and a return to the 2% target remains uncertain due to the potential impact of higher energy prices caused by the Israeli-Palestinian conflict.
The U.S. inflation rate continues to exceed expectations, raising concerns among investors about the Federal Reserve's rate-hiking cycle and the possibility of maintaining current interest rates in November.
Investors are closely watching inflation data from Spain, France, and Sweden after US data showed sticky inflation, while the latest report from China highlighted persistent deflationary pressures, with markets now pricing in a 40% probability of a rate hike in December.
Global shares slip as stronger-than-expected US inflation figures and upcoming European consumer price data heighten concerns about central banks keeping interest rates higher for longer.
Federal Reserve officials are expected to pause on raising interest rates at their next meeting due to recent increases in bond yields, but they are not ruling out future rate increases as economic data continues to show a strong economy and potential inflation risks. The Fed is cautious about signaling an end to further tightening and is focused on balancing the risk of overshooting inflation targets with the need to avoid a recession. The recent surge in bond yields may provide some restraint on the economy, but policymakers are closely monitoring financial conditions and inflation expectations.
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