Dollar and oil edge up, stocks drift lower as US CPI awaited

Markets await CPI data for direction

The US dollar rose marginally against a basket of currencies on Wednesday, gaining strength mainly on the back of the yen’s ongoing woes and some fresh hawkish soundbites from the Fed. In the broader FX picture, though, major currencies have been moving sideways this week, still digesting Friday’s weak US jobs report and waiting for an update on the US-Iran negotiations amid the impasse.

Expectations that the Fed will hike interest rates in September have risen slightly today thanks to remarks by Boston and Chicago Fed Presidents Susan Collins and Austan Goolsbee. Collins hinted that she’s ready to back a September rate rise if inflation stays high while Goolsbee said the US economy has an inflation problem.   

Neither are voting FOMC members this year, but their comments suggest that a hike remains firmly on the table for the September meeting even after the surprise decline in payrolls last month. Yet, September odds have remained largely a coin toss, and it will likely take a very strong CPI report or hawkish signals from Fed Chair Kevin Warsh himself to push up expectations significantly.

However, today’s CPI numbers are unlikely to do that as both headline and core inflation likely moderated in July, keeping the Fed in wait-and-see mode.

Hawkish BoJ, higher JGB yields unable to lift yen

US Treasury yields climbed to more than one-week highs yesterday before pulling back, driven higher by the rebound in oil prices, which has lifted sovereign bond yields across the board. But Japanese yields have been rallying the most, which were additionally boosted by Monday’s Summary of Opinions of the Bank of Japan’s July meeting.

BoJ policymakers appear to be increasingly leaning towards September for their next rate hike, as pressure grows on the central bank to accelerate the pace of tightening amid the yen’s constant weakness. With the situation in the Middle East unlikely to be resolved quickly, a growing number of board members are worried about falling behind the inflation curve.

Yet, even with the sharp jump in September odds since the end of July, which have risen to 60%, and the rally in short-term JGB yields to three-decade highs, selling pressure on the yen persists. The yen has erased almost half of its post-intervention gains, with the dollar reclaiming the 159-yen level this week.

If there are any upside surprises in the CPI readings, the yen is the most vulnerable to suffer a big drop.

Oil prices climb again as Iran talks continue

The impasse in US-Iran talks aimed at reaching a deal on reopening the Strait of Hormuz has upped the risk of a large market reaction to a hotter-than-expected inflation report. Hopes of a deal faded on Monday when President Trump made fresh demands in response to the Iranian side attempting to attach new conditions to any agreement.

But the mood has improved slightly in the last 24 hours, with Pakistan saying that the US and Iran are “close to some sort of arrangement”. However, even if an agreement is reached, it could be some time before the Strait of Hormuz reopens, while any mistrust about compliance by either side could see the deal fall through.

WTI oil futures are inching higher today, trading around $83.50 a barrel, while Brent crude briefly hit $90 a barrel for the first time since July 31. Both are up almost 7% this week.

Continued attacks on ships in both the Hormuz and Bab el-Mandeb straits are undermining peace efforts. The latest attacks come from Houthi rebels in the Red Sea, killing six people after firing on a cargo ship, while American forces fired on a vessel trying to break the US blockade of Iranian ports.

Stocks stay subdued, Cisco earnings eyed

The stalemate in the Middle East is one reason why the rebound in equity markets stalled this week. All three of Wall Street’s main indices closed in the red on Monday and Tuesday, while futures are mixed on Wednesday. Korean chip stocks have been bucking the trend, with SK Hynix rebounding 5.8%, but the performance of US chipmakers as well as Magnificent Seven stocks has been more mixed.

Cisco Systems will come into the spotlight today when it reports its earnings after the market close. But with AI earnings almost drawing to a close, sentiment will be guided much more by Fed rate hike bets and oil prices.  

The S&P 500 closed at a new all-time high on Friday when the dismal payrolls figures supported the case for a long Fed pause. If the CPI data is also soft, stocks are likely to rally again.