US CPI Aftermath: How equities, gold and silver reacted; is a September rate hike still on?

Markets reacted positively as recent data indicated no imminent interest rate hike, with July’s CPI showing easing inflation and last week’s job numbers not suggesting an increase in rates anytime soon. The July CPI inflation report showed a 3.4% year-over-year increase in inflation, a slight decrease from June’s 3.5%. The core CPI rose 2.5%, down from 2.6%, marking its lowest level since February.

These figures met economists’ expectations, and the probability of a rate hike went south. The CME Group’s FedWatch tool indicates a 66% chance of the Federal Reserve keeping rates unchanged at the next FOMC meeting in September, up from 50% previously.

“The July CPI report narrowly meets the bar to nudge the Fed toward holding rates steady at their next meeting in September. Fed policymakers signaled in July that core inflation would have to improve between now and then for them to refrain from raising interest rates. The Fed will also see the August CPI reports among a number of other data releases, so the CPI is not the final word,” says Bill Adams, Chief U.S. Economist, Fifth Third Commercial Bank.

Fed officials are meeting over two days, 15-16 September, to decide on the next course of action. The meeting will also see the release of a Summary of Economic Projections. Kevin Warsh may refrain from sharing his prediction for the ‘dot plot’ as previously.

Last time, there were 3 out of 12 members who voted for a rate hike. The FOMC Meeting Minutes releasing next week will reveal a better picture. “Our baseline is the Fed holds rates steady, but an increasing number of voting members are hawkish and could convince the majority to implement a hike. Overall risk sentiment is positive as inflation is expected to improve by the end of the year,” says Jeffrey Roach, Chief Economist for LPL Financial.

Meanwhile, a lot of economic data including August CPI and PPI numbers and the job market data will be available before that meeting takes place. That could influence the narrative. Even so, unless the data significantly alters the outlook, the Fed is expected to maintain current interest rates next month.

“The CPI numbers were basically as expected and showed the underlying inflation impulse in July was quite subdued. When coupled with Friday’s jobs numbers it lends itself to the Fed holding rates in September. That’s good for Wall Street; precious metals ought to respond positively too. The big caveat is that, very much by design, we don’t really know the Fed’s reaction function. That means some risk of a rate hike in September will likely persist and create some uncertainty,” says Kyle Rodda, Senior Financial Market Analyst at Capital.com.

Major U.S. stock indexes mostly rose, although most tech stocks, particularly the Magnificent Seven, did not fare as well. Nvidia (NVDA) was the exception, increasing by 3%, while Alphabet (GOOGL) saw a slight decline.

How Could Rising Oil Prices Complicate Trump’s Political Calculus?

US mid term elections are nearing. Brent oil continues to trade around $87, ending a six-session rally as investors shifted their focus toward weakening demand prospects and continued disruption around the Strait of Hormuz.

Any rise on oil prices from now and the next FOMC meeting may bring back the narrative around a rate hike. That, in turn, could be working against Trump’s desires. “For Trump, this data brings a lot of trouble as his ratings are already down and he is already unpopular with the ongoing war. So with inflation being so high, things are only becoming worse, which means that he really needs to put an end to this US-Iran war and really start working for the Americans,” says Artem Bakushev, Head of Risk, Monaxa.

Nic Puckrin, markets expert and former Goldman Sachs analyst, sums up the Catch-22 situation for the US Fed. “If the situation in Iran remains volatile, oil prices won’t be coming down to manageable levels. That makes it very hard to tame the inflation genie without raising rates.

The problem is, last week showed that the labour market is cracking. That puts the Fed in a difficult bind. It can’t cut to save the jobs market without pouring fuel on the inflation fire, and if it hikes to tame prices it risks pushing the jobs market over the edge,” says Puckrin.

Gold and Silver Prices Slip Under Pressure

After July CPI came in as per expectations, gold and silver prices shot up. But the relief was short-lived, as the decks are not clear yet. On Thursday, both the precious metals are again under pressure. Gold fell below $4,400 an ounce on Thursday after hitting a ten-week high earlier, as investors remained cautious before upcoming US producer inflation data. Gold also faced pressure due to high oil prices and limited hopes for a deal to reopen the Strait of Hormuz. Silver slipped below $65 an ounce on Thursday after reaching a seven-week high earlier in the session.

Is the Iran Conflict the Real Wildcard for Markets?

The state of financial markets depends a lot on the fluid situation created in Iran. Oil prices will have an immediate impact on dollar, bond yields, interest rates and even on gold, silver prices. For the US stock market investors, the AI-led trade remains the biggest hook to hang on to, with the mid-term elections approaching.

History suggests that midterm elections have had only a modest impact on financial markets. U.S. equities have rarely experienced sustained outperformance or underperformance in the three to six months following the vote, while interest-rate markets have generally been driven more by Federal Reserve policy than election outcomes, according to data from Bloomberg and Morgan Stanley Research.

Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Market conditions, economic data, and Federal Reserve policy are subject to change. The views and opinions expressed by the experts quoted herein, if any, are their own and do not necessarily reflect the views of the publication. Financial Express is not responsible for any decisions made based on this information.