Investor focus was directed towards key U.S. inflation report on Thursday.
Through a persistent series of interest rate hikes, the Federal Reserve has
significantly reduced the escalation of consumer price levels from the
substantial 9.1% observed in June 2022.
The monthly headline consumer price index (CPI) remained unchanged at 0.2%,
in line with projections. On an annual basis, the index accelerated to
3.2%, surpassing June’s figure of 3.0%, but below estimates of 3.3%.
The monthly core CPI, which excludes volatile components such as food and
energy, remained unchanged at 0.2%, while the annual figure rose by 4.7%
below forecasts and June’s reading of 4.8%.
The predominant contributor to the monthly inflation surge was shelter
costs, which rose 0.4% for the month and 7.7% from the previous year. Food
prices experienced a 0.2% increase on a monthly basis, while energy prices
saw a mere 0.1% uptick, despite notable surges in crude oil prices and
corresponding pump prices.
Collectively, the latest dataset underscores that while inflation has
receded from the peak levels observed in mid-2022, it still remains notably
above the Federal Reserve’s target of 2% which makes near-term interest
rate cuts unlikely.
While the direction of inflation is promising, its persistent elevation
implies that the Federal Reserve has not done its job yet. The process of
disinflation is expected to be somewhat challenging and may necessitate
further economic adjustments before achieving a sustainable alignment with
the 2% target.
Nevertheless, the decelerating trends are alleviating some of the pressure
on the Federal Reserve to continue its policy of tightening.
Recent statements from various regional Federal Reserve presidents have
revealed differing perspectives on the trajectory of rate hikes, with some
foreseeing their conclusion while others anticipate further increases.
Regardless of these viewpoints, a consensus has emerged that elevated rates
will likely persist for the rest of the year.
The latest CPI report enhances the likelihood of the Federal Reserve
maintaining unchanged interest rates at the upcoming September meeting.
According to the CME FedWatch Tool, there is a 90.5% probability that the
Federal Reserve will keep interest rates steady at its next meeting.
The progress in curbing inflation, coupled with robust economic growth and
a gradually cooling labour market, represents another stride in the right
direction for the central bank.
The highest interest rates in 22 years have played a pivotal role in
mitigating inflation without substantially impacting economic growth. The
first two quarters of 2023 witnessed GDP gains of 2% and 2.4%,
respectively, and the Atlanta Federal Reserve is forecasting third-quarter
growth of 4.1%.
Source: TradingView
From a technical analysis perspective despite constructive price action and
supportive momentum conditions, given the stellar run from the onset of the
year, price action in the near-term is likely to become choppier. Still a
re-test of the previous all-time high posted in November 2022 is feasible.
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