All bets could be off if CPI flares up further

2 mins read

By Naeem Aslam  

US and European stock futures are trading flat ahead of an important economic event that has all traders fully engaged: the US CPI number.

So far this week, the US stock indices are barely keeping themselves in positive territory, and this is despite the fact that most traders believe the Federal Reserve will not increase interest rates this month.

The fact that there could be another rate hike by the Fed next month is keeping traders very nervous, and it is in this context that Wednesday’s US CPI is of high importance.

If we look at the overall inflation situation in the US, there is no doubt that the Fed’s monetary policy has worked, as inflation is much closer to the target of 2% now as compared to a few months ago.

At the same time, traders also know that the current journey of inflation moving from its present levels towards the Fed’s desired level is going to be a lot more difficult, and this is mainly because of two major risks.

First, economic activity has slowed substantially in the US, and no one can say that the risk of a soft landing has gone. In fact, a soft landing remains the best-case scenario among most traders, while speculators believe that the door is still wide open for the US economy to have a hard landing.

Second, oil prices represent a massive risk of inflation.

It is highly unlikely that we will see oil prices moving lower due to supply concerns, and if oil prices cannot move lower, then there is a real risk that we could see a change in the direction of the inflation trend, which means that we could see inflation readings moving back to the upside.

If we look at the July US CPI reading, it becomes clear that the 3.1% was the lowest for the US economy since May 2022, and even since then, the number has been struggling to move lower.

Even last month, we saw a further upward movement in the CPI, which printed a reading of 3.2% against the forecast of 3.3%.

Going to Wednesday’s number, the expectation for the US CPI is 3.6% against the forecast of 3.2%. This is a fairly big jump compared to the July number, and traders are nervous about this.

Game play

If Wednesday’s figure matches the forecast of 3.56%, it is unlikely to change the Fed’s current stance, which means that there could be one more rate hike next month. Although our base case scenario continues to remain that the Fed is very much done with the rate hike.

However, if the number comes closer to July’s reading of 3.1%, this could boost confidence among traders, and we could see the US stock market rally as traders would not anticipate any more action from the Fed in terms of their rate hike cycle.

On the flip side, if the US CPI comes much hotter than the current anticipation and the reading goes beyond the expectation of 3.6%, then all bets will be off and the US stock market will experience a serious sell-off as traders will grow highly nervous for further strong action by the Fed, which could lead to a dramatic slowdown in the economy.

Oil prices continue their run

Oil prices continue near their 10-month high as traders believe that oil supply is unlikely to ease off.

Currently, the supply equation is the most important, and this is because traders are not only worried about an announced action by OPEC, but also about some serious threats of supply disruption from Libya.

Although oil production from Libya isn’t significant, traders are more sensitive to supply issues, and this is very much keeping them nervous.

Traders also must keep a close eye on the US crude oil inventory, as further drawdown news in that number is likely to influence crude prices as well, and the number will be released on Thursday.

The fact that the EIA continues to send messages raising concern about global oil inventories declining by half a million, isn’t helping the overall situation either, and traders continue to remain on edge.


Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.