Investors turn cautious ahead of US CPI data

CPI inflation numbers to set the tone for the dollar

The US dollar traded lower against all the other major currencies on Tuesday and it is extending its slide early on Wednesday, despite Boston Fed President Susan Collins supporting another rate increase this year, and despite ongoing hostilities in the Middle East pushing oil prices higher.

Perhaps the dollar slid as traders decided to limit their exposure ahead of today’s CPI report and/or amid a slide in long-dated yields after New York Fed President Williams said that inflation should slow considerably and saw no need for additional hikes in 2027. Also, investors may have decided to buy Treasuries due to yields reaching extremely attractive levels.

Today, dollar traders are likely to lock their gaze on the US CPI inflation data for September as they try to clear the fog around the Fed’s future course of action. With the prices subcomponents of the ISM and S&P Global PMIs pointing to acceleration, the risks surrounding the CPI figures may be tilted to the upside.

According to Fed funds futures, the probability of the Fed pressing the hike button later this month has remained low at 20%, while a quarter-point increase is more than fully priced in for December. A total of 80bps worth of hikes is still baked into the cake by the end of next year.

Therefore, even if the probability of an October hike does not improve substantially, hotter-than-expected inflation data could prompt investors to add more basis points worth of hikes for 2027, especially as the ongoing tensions in the Middle East are keeping oil prices elevated.

WTI emerges above $95.00, gold extends slide within range

WTI crude oil emerged above $95.00 yesterday after Iran-backed Houthi forces launched missiles toward Saudi Arabia, targeting major cities and facilities linked to Saudi Aramco. Houthi-run media also said that Saudis struck a Yemen Petroleum Company fuel depot. The escalation kept shipping through the Strait of Hormuz in focus and increased the geopolitical premium on oil prices, thereby increasing concerns about sticky inflation.

Gold did not follow the normal route it follows every time the dollar weakens and yields retreat. Instead of rising, it declined. Perhaps gold traders were more worried that the rebound in energy prices could reinforce Fed-hike expectations.

After briefly exceeding the key zone of $4,200 and hitting resistance at $4,218 on Monday, the precious metal entered a retreating phase, staying within the $4,115-$4,200 range. Hotter than expected inflation numbers later today may encourage the bears to decisively dive below the $4,115 territory.

Wall Street subdued amid mixed bank earnings, awaits CPI data

On Wall Street, the Dow Jones and the Nasdaq closed in negative territory yesterday, while the S&P 500 finished virtually unchanged.  Although, futures are pointing to a minor recovery today, the moves are far from suggesting strong positioning as the CPI data could well impact the short-term outlook.

Besides cautious trading ahead of the CPI report, what may have also contributed to the slide in the Dow Jones and the Nasdaq may have been the mixed quarterly results from the banks and the slide in chip stocks. Should the inflation numbers today lift the implied Fed rate path, stocks could lose some more ground as increased expectations of rate hikes could weigh on the present values (PVs) of high growth firms, which are valued by discounting expected free cash flows for the quarters and years ahead.