US CPI Preview: Focus stays on the core print
After jobs and geopolitics, focus may also be turning to US inflation numbers due this week. Bear steepening of the yield curve in the recent weeks suggests that markets are still more concerned about inflation remaining high in the long run than the risk of a recession in a near term. Meanwhile, the rise in oil and gasoline prices recently is pushing headline inflation higher. After the surge to 3.7% YoY in August, consensus now expects some cooling in headline inflation to 3.6% YoY as oil prices steadied somewhat in the month.
Core CPI is also likely to be pulled lower due to the decline in rents and shelter inflation, but some of the other services categories such as car insurance and medical services could remain sticky. Consensus expects core CPI to cool to 4.1% YoY in September from 4.3% in August. While that means overall disinflation trends could remain intact, taking too much comfort from a soft inflation print may be premature given the uncertainty around commodity prices with the geopolitical landscape facing fresh risks. Fed is unlikely to hike rates in this volatile environment, and barring any strong upside surprises, rates may likely stay on hold at the November meeting. But as long as economic data does not weaken, Fed will keep pressing on its higher-for-longer message. Meanwhile, other key data such as advance US GDP (due on 26 October) and PCE (due on October 27) will be on watch ahead of the FOMC decision on 1 November.
That leads us to believe that a higher-than-expected core CPI print could give further legs to the higher-for-longer narrative, boosting USD further and weighing on JPY as well as risk sensitive currencies like AUD and NZD. However, a softer-than-expected print will just reaffirm what the markets have already priced in – an extended Fed pause.
ILS: Bank of Israel supports the shekel
The Israeli shekel has come under pressure after the weekend attack from Hamas. Prior to the attacks as well, the controversial plans by the Israeli government to reform and weaken the judiciary have weighed on the currency, but weekend events brough USDILS to its highest levels since 2016.
The Bank of Israel (BoI) announced yesterday that it is prepared to sell up to $30 billion from its $203 billion FX reserves to support the shekel, and this could also be extended by $15 billion through swap mechanisms. This helped USDILS to drop back towards 3.92 from highs of 3.9622 yesterday. Israel’s central bank could continue to smoothen the volatility given its large FX reserves.