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Will the US CPI data hold up or is there more disappointment in store?

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Traders will be looking at the consumer price index data to be released today. According to economists polled, consumer prices are expected to rise 0.1% on the month. This would reverse the 0.1% decline seen in the previous month. On a year over year basis, headline consumer prices are expected to rise 1.7%, marking a slower pace of increase after registering a 1.9% increase in the previous month.

Excluding food and energy prices, core consumer price is expected to rise 0.2%, extending the gains from 0.1% registered during the previous month. On a yearly basis, core CPI is expected to 1.7%, rising at the same pace as the previous month.

Fed concerns on inflation

Inflation data is likely to remain a central point for the Fed. The Fed chair, Janet Yellen told lawmakers earlier this week in her congressional testimony that inflation could pick up following the robust labor market.

According to Ms. Yellen, the tighter labor market conditions could eventually push up wages and inflation as a result. However, despite sounding confident, the Fed Chair said that inflation could remain below the Fed’s 2% inflation target rate for a considerable period of time.

Thus, today’s inflation data will be critical for the markets. Further weakness or evidence of no inflation pressures could potentially dent the expectations of further rate hikes from the Fed.

The Fed is expecting to make a case for one more rate hike later this year. However, the odds of a rate hike are starting to diminish with the market’s pricing in around a 50% chance of a rate hike this year.

Fed’s Beige book shows modest expansion in the economy

On Wednesday, the Fed’s Beige book report showed that the US economy increased at a moderate pace in the last several weeks. Wage pressures were reported across both the low and highly skilled jobs as well.

The Fed’s Beige book report said, “Activity expanded across all 12 Federal Reserve Districts in June, with the pace of growth ranging from slight to moderate.” The data was based on the reports from the 12 regional Federal Reserve banks.

On employment, the data showed that there was only a modest pace of expansion with rising wage pressures bring noted. On household spending, the report showed that household spending remained stable, but there were signs of auto sales declining in the first half.

The report was consistent with the view that despite unemployment rate staying low, wage pressures were yet to show acceleration.

US producer prices remain little changed

Yesterday, the US producer prices index showed a modest increase of just 0.1% in June compared to the month before. This was slightly above the economists’ forecasts who expected a flat reading for the month.

U.S. Producer prices index: 2.0%, YoY
U.S. Producer prices index: 2.0%, YoY

Excluding food and energy and trade services, the core producer prices index rose 0.2% on the month. On a year over year basis, PPI was seen rising 2% similar to the trend seen in the previous months. The pace of increase in the PPI suggested that the momentum was little changed for the most part this year.

A certain report tied to the consumer prices showed a flat reading on a month over month basis and was up 1.9% on the year. The PPI data is likely to dampen the outlook for today’s consumer price index data.

The US dollar was seen showing signs of strengthening especially against the euro. EURUSD fell to an intraday low of $1.1371, marking a 5-day low. Despite the short-term declines, EURUSD is poised to remain biased to the upside. This comes at a time when the uncertainty on the Fed’s policies and increasing concerns of a slowdown in the US economy puts to question the timing of the next rate hike.

At the recent congressional testimony, the Fed chair herself noted that this was a “dovish tightening cycle,” in reference to the Fed’s current policy normalization.

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