For global investors, all eyes will be on the United States, with inflation being the major focus as July CPI data will be announced today. The CPI data for July 2023 are set to be published on August 10, 2023, at 8:30 a.m. Eastern Time.
What makes the latest CPI numbers important for investors is the fear of inflation making a comeback. If inflation spikes, the US Fed could be under pressure to remain aggressive and keep hiking rates. This, in turn, could be determinantal to the banking sector. Two days back, Moody has reduced credit ratings for 10 banks, raising concerns about liquidity crunch and financial institution failures.
The June US CPI numbers issued in July showed that inflation had slowed to 3%, which was lower than expected. The consumer price index in the United States is predicted to grow slightly in July to 3.3% year on year, while the core rate is expected to remain unchanged at 4.8%.
“With services and shelter remaining hot, commodities inflecting higher and goods prices declining, this Thursday’s CPI is likely to come in at 0.4% for the headline and 0.3% for core, above the consensus expectation of 0.2% on both fronts,” says José Torres, Senior Economist at Interactive Brokers.
The US Federal Reserve’s war on inflation is just half-won. Even if price growth has slowed significantly over the last 18 months, the US Fed’s 2% target remains some distance away. Meanwhile, market participants believe the Fed is nearing the end of its rate hiking cycle and will shortly begin decreasing rates, helping stock market recovery in the second half of 2023.
A negative surprise, on the other hand, may ruin the stock market celebration sooner. Despite significant wage growth and a reduction in the unemployment rate, the US economy added fewer jobs than expected in July, signaling that the Federal Reserve may keep interest rates higher for longer. More interest rate hikes are anticipated to be needed to bring inflation down to the Fed’s 2% target.
The consumer price index in the United States is expected to rise slightly in July to 3.3% on an annual basis, while the core rate may remain steady at 4.8%. Year-on-year figures have some upside risk given their recent slowing, but this is mainly to declining energy costs last summer being omitted from the annual comparison. The Federal Reserve, on the other hand, will concentrate on monthly measurements.
The increased focus on the banking industry reduced Wall Street’s optimism, which had already been harmed by comments from a Federal Reserve official suggesting future rate hikes to manage inflation. According to Fed Governor Michelle Bowman, additional hikes “will likely be needed,” causing the two-year yield to rise before partially reversing its upward trajectory.
Investors have been on the lookout for signs of stress in the industry as rising interest rates force businesses to pay more for deposits and drive up the cost of alternative financing. This is due to investor concern at the demise of smaller banks in California and New York this year. Furthermore, increased interest rates may harm lenders’ balance sheets by depreciating assets held by banks and making it more difficult for commercial real estate borrowers to refinance their debt.
According to ING Think – The move higher in Treasury yields only adds to our conviction that the Fed won’t need to hike interest rates further. We are approaching 4.2% for the 10Y Treasury yield in the wake of the Fitch downgrade and the Treasury funding announcement, and it could go higher over the next week as the extra bond supply hits the market. This, coupled with the stronger dollar and rising market volatility, is tightening monetary conditions and will put up mortgage rates and corporate borrowing costs.
The Federal Reserve Senior Loan Officer Opinion survey shows a further tightening of lending conditions, which in combination with higher interest rates, will be toxic for bank lending. This is going to be a major headwind for economic activity – hence our view that recession risks cannot be ignored.