Commentary from Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, in response to the US inflation figures published today.
"US inflation surprised to the upside in August, with core consumer price index (CPI) rising a firm +0.29% month on month (M/M) and the annualised rate just about rounding down to 2.4% Year on Year, from 2.5% last month. Artificial intelligence (AI) linked components showed strong performance which is not surprising. The print is above the threshold (0.24% m/m) we were watching for the Fed to judge inflation as still making sufficient progress to stay on hold and comes on the heels of yesterday’s hot producer price index (PPI) and last week’s strong payrolls report. Market pricing for a September hike has jumped to around 90%, and we think it is highly unlikely the Fed resists hiking Next week, least of all due to the elevated oil prices.
"We have been more hawkish vs consensus (which is now catching-up to our view that any hiking will be a cycle not a one and done) and continue to expect a renewed Fed hiking cycle (3-4 hikes), which likely begins Next week, reflecting the RESILIENT economy and still-stimulative policy settings.
"This was the marquee data point ahead of Next week’s meeting. With the Fed in blackout, there will be no official guidance before the decision, but we are keeping a close eye for any sourced media reports that could shift pricing or flag a surprise. Oil also remains the other key swing factor, particularly amid reports of Gulf ministers pushing for a Hormuz deal. But as things stand, we think the Fed has enough evidence to start hiking Next week—or risk falling further behind the curve. Staying on hold could raise credibility concerns, particularly after the hawkish message delivered at Jackson Hole.
"The behaviour of treasury bonds show how much importance the market is placing on credibility of the Fed vs buybacks in keeping long end treasuries (which is now showing fall in yields post the release) in check. There is an argument that the Fed should have hiked in July but the approaching mid-term elections add a political dynamic to policy decisions. Bessent has tried to help with the long-end but it will be interesting to see how a Warsh-led Fed navigates the US administration’s aversion to rate rises. There is a chance that newsflow could shape pricing ahead of Next week’s meeting, which we’ll be monitoring closely. That said, if 80-90% probability sustains into the meeting, we think it will be incredibly difficult for the Fed to not hike.”
