The most critical data of the week has been published. US inflation data had another surprise upside to reincrease the USD demand and encourage bears among riskier asset charts.
The return of fear and worries in the financial markets
According to the US Bureau of Labor Statistics data, US Consumer Price Index increased 0.1% in August, while market participants were waiting for a slight decrease after unchanged July numbers. With the slight monthly increase, the annual number was also higher than 8.1% expectations, even if the 8.3% raise was less than 8.5% July annual inflation. On the core data front, there were not many optimistic points beyond energy goods. Excluding food and energy prices, core inflation increased by 0.6%, twice more than 0.3% of market estimates. This unexpected monthly increase in August sent the annual rate to 6.3%, which is the highest number seen after the 40-year high of March 2022.
For the headline, despite the 10% average drop in oil prices, the Gas price increase offset this reduction, and it was the main reason to see that headline did not fall as much as was expected; however, even that 0.2% decrease from July also can be a positive sign. On the flip side, a 0.8% monthly increase in food prices will affect the consumer’s decisions for spending, with prices at the grocery store checkout counter that now are up 13.5%compared with a year ago, which is the most significant increase since February 1979, we can expect less expending and lower GDP numbers for next quarter.
Since these numbers are well above the FED target of 2%, a 75-bps rate hike is now all but assured. The market also directly reacted to these data, as was expected and mentioned in the weekly outlook. The US dollar index raised more than 1%, to be seen above the 109.30 mark, and the US 10-year bond yield is now about 3.43%. With increasing the risks in the markets, now we can see the USVIX above 26.30 agin and a free-fall among US leading indices. Dow Jones Industrial Average is down about 2.8%, and SP500 is losing more than 3.2%, while with higher yields, the Nasdaq composite leads the bear with a decrease of more than 4.1%. With these data and sentiment in the market, bears can lead the prices, but we can not call it a free fall; a slight decrease is expected before the FOMC meeting.