FX Update: Scorching US June CPI print puts Powell in the hot seat.
Head of FX Strategy
Summary: The US June CPI report came in far hotter than expected at both the core and headline, setting a new high bar for the cycle. While some will point to the especially large contribution from the used cars and trucks category to the higher than expected reading, a number of other categories have shown strong rises in recent months and the Fed is at risk of having to make a course correction the market is far from prepared to absorb.
FX Trading focus: Hot US CPI data prompts fears of Fed course correction
US June CPI facts: headline was +0.9% MoM and +5.4% YoY vs. +0.5%/+4.9% expected and vs. +5.0% YoY in May. The Ex Food and Energy CPI was +0.9% MoM and +4.5% YoY vs. +0.4%/+4.0% expected and vs. +3.8% YoY in May.
A short update today as the heat in today’s US June CPI report requires at least a brief comment – see the full table of the numbers in the official BLS report below. The bottom line: this number is too hot to ignore and the market is right in reacting quite strongly to it, as it strongly raises the risk that the Fed will need to move soon to get ahead of fears that this inflationary spike will prove far larger than previously anticipated, and may not be as transitory as the recent “Goldilocks” backdrop of lower long US yields and forever higher risk asset prices suggested.
In reaction to the data, the EuroDollar short-term interest rate futures are pulling back forward the anticipated first Fed rate hike, though in the case of the December 2022 EuroDollar contract, to take an example, we are still about four ticks/basis points away from the lows posted not long after the June 16 FOMC meeting that sparked the recent US dollar rally. The greenback itself is rising sharply and EURUSD is close to touching the recent lows below 1.1800, while AUDUSD is in a similar spot, with its recent lows near the pivotal 0.7400 area, while the next keys for EURUSD are perhaps 1.1775 and then the 1.1704 low from March 31.
This data not only generally sets the market a bit more on edge, but increases focus on everything inflation related from here, including incoming data like the inflation expectations in the July flash University of Michigan sentiment survey release on Friday, but also anything anecdotal in the Fed Beige Book out tomorrow evening. It also puts Powell in the hot seat in testimony before Congressional panels tomorrow and Thursday, but also in general heading into the FOMC meeting the week after next as data like this raises the risk that the Fed will have to make an embarrassing retreat from its complacent stance on inflation and have to reach out soon to taper MBS purchases and perhaps even US Treasury purchases sooner rather than later.
Graphic: US BLS Consumer Price Index table for June
The official monthly publication of the US CPI from the BLS shows that a number of categories are contributing to the upside surprise in the CPI today. Sure, the “Used cars and trucks” category was once again a major contributor to the higher than expected figure and is running at levels that are hardly sustainable beyond the nearest term. But a few other categories have shown a cluster of high readings that bear close watching. Importantly, the shelter component could become a leader in driving inflation in months to come if the past lagging performance relative to house prices (which are soaring) holds. Even the last three months in that category are running at a 4.9% annualized clip. I have also circled food – note especially Food Away from Home (where workers are hard to find and businesses may have to bid up wages) – and apparel.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.