US CPI: The Key Piece of the Macroeconomic Puzzle for the Fed

Last week’s non-farm payrolls print was strong on the surface, coming in at +162,000 against expectations of just +55,000. Yet the details were less clear-cut. Wage growth slowed to 3.1%, and seasonal factors, particularly a solid contribution from education jobs, appear to have flattered the headline. That leaves the inflation data as the potential tie-breaker. A softer-than-expected CPI reading would strengthen the case for the Fed to remain on hold. A hotter print, however, could force Chairman Kevin Warsh to back up his hawkish Jackson Hole rhetoric with actual action in the form of a rate increase.

US equities were closed on Monday for the Labor Day holiday and have resumed trading in the red, with the primary culprit being the renewed climb in oil prices. Risk assets rarely welcome the sight of crude heading higher, given the adverse implications for inflation, interest rates, and ultimately both economic and corporate growth. The latest escalation between the United States and Iran over the weekend and into recent days, combined with stepped-up Houthi attacks that have reportedly damaged energy infrastructure in Saudi Arabia, has pushed Brent crude back onto the doorstep of $100. Even as Iran and Oman continue efforts to broker a bilateral arrangement around shipping transit through the Strait of Hormuz, the market remains sceptical after previous deals proved short-lived. In the absence of genuine de-escalation from the key players, the upside bias in oil remains firmly in place.

‍

In the foreign exchange market, yen strength has been gaining traction. What looks like a delayed reaction to earlier US-Japan intervention around the 163–164 levels in USDJPY, possibly reinforced by further intervention this week, has squeezed yen shorts and brought the pair back to more comfortable territory for officials in both Washington and Tokyo. For this yen strength to be sustained, however, more may be required from the Bank of Japan. A widely expected 25 basis point hike later this month is already largely priced in. What could really sustain the recent yen strength is if the BoJ begins preparing the market for a more accelerated tightening path, rather than the gradual one-to-two hikes per year that investors have become accustomed to.

‍

Gold has spent much of the week on the back foot. The stronger payrolls number, still-elevated Treasury yields, and the latest push higher in oil prices have combined to limit any meaningful recovery in the precious metal. A tame CPI outcome on Friday would likely provide some relief, as it would dial back expectations of an imminent Fed hike. Conversely, a stronger-than-expected inflation reading could subject gold to further selling pressure. So, for the time being, gold’s moves remain at the mercy of bond yields and the oil price until the US CPI data arrives. Levels to watch include support at $4,350, $4,290 and $4,230, with resistance at $4,480 and $4,590.