Surging US CPI rattles markets
The jump in the US inflation rate triggered major volatility in the markets as traders now feel the Federal Reserve will be even more hawkish than previously expected. US CPI jumped to 9.1%, from 8.6%, comfortably topping the 8.8% forecast. Even before the data was announced, the interest rate futures market was pricing in a very high probability of the Fed doing another 0.75% hike this month. Following the numbers, the markets are predicting an 80% probability of a 0.75% rise in September. The prospect of the US central bank tightening rates at an even faster pace pushed up yields and the US 10-year yield briefly topped 3%. In keeping with recent price action, US stocks sold off sharply, but equities are off the low of the session. A surge in inflation hurts stocks on two fronts, firstly, the higher cost of living dents consumers disposable income, which hits demand. Secondly, central banks usually lift rates to curb rising inflation, which compounds the original problem.
It has been a very eventful afternoon for the US dollar as it was initially jolted higher in the wake of the CPI report being released. At one point, EUR/USD briefly traded around parity but since then the dollar has gone into reverse mode. EUR/USD is now trading near 1.0100, which is a remarkable turnaround. Gold also saw a U-turn because of the move in the greenback. The yellow metal came under attack on account of the rallying greenback, but it is now up over 0.8%.
In recent months, central banks have been making up for lost time by aggressively lifting rates. The Bank of Canada took things up a notch by hiking rates by 1%, ahead of the 0.75% forecast, such a bold move shows us how keen the BoC are to curb rising inflation. Central banks typically like to keep in a similar interest rate zone to one another, so it is possible that other banks might look to carry out large lifts too. The European Central Bank has yet to lift rates, but their meeting is next week so the move by the Canadians might put pressure on them to do a large hike.