Today’s US August CPI revealed a surprisingly soft core price rise, alongside the expected headline gain. Headline CPI rose 0.2% (rounded from 0.223%) with a 0.1% (0.082%) core consumer gain. The y/y increase of 2.7% in the headline index was down from 2.9% in July and June, and the 2.2% y/y core reading was down from 2.4% in July. Core gains reverted back to a softer path, with the average over the past six month at 0.16%. This data report is in line with expectations of a pull-back in headline y/y inflation that extends into Q4. Expectations are for a 0.1% September CPI gains for the headline and a 0.2% gain for the core with a 0.6% energy down-tick that should leave a 2.4% y/y headline rise, down from 2.7% in August. The core should be 2.2% y/y, steady from August. The core y/y price gain should be 2.0%, as also seen in July and May. An unwind of hard comparisons should allow a September drop-back for the headline y/y pace to 2.0%, while the core y/y rate slips to 1.9%. Both measures look poised to sustain these rates through Q4.
The Dollar weakened, with EURUSD shooting up to 1.1687 and looking to test the two-week high at 1.1705, following the downside miss in US CPI, along with risk-on conditions as US-China trade talks are set to restart, and as NAFTA negotiations with Canada remain upbeat. The CPI miss has also put pressure on the expectations for a December rate hike. Fed funds futures are fractionally higher following the CPI data and this brings into question a December tightening. The near-term contracts are flat as the market is basically fully priced for a 25 bp hike at the upcoming September 25-26 FOMC meeting. Chances for another move in December are running about 60-40, and that would be a fourth tightening this year, as suggested by the dot plot. The futures are sceptical that the FOMC will tighten three times in 2019, with a 25 bp hike expected by the end of Q2.