Muted Trade Ahead of CPI Data

MACRO FRAME

July’s payrolls have put September Fed hike expectations in doubt ahead of Wednesday’s inflation data, though a hot print could restore expectations.

STOCK INDEX FUTURES

Equity index futures held steady overnight, while oil prices and Treasury yields also made little move. Trading activity is likely to be light ahead of tomorrow’s CPI data with markets in wait-and-see mode, while many traders are also on vacation. Pakistani and Qatari authorities signaled some optimism on a US-Iran deal, with Pakistan’s defense minister telling Bloomberg that the two sides are close to a deal, though rhetoric from Iran and the US Tehran has proven otherwise. The unclear path to end the way and reopen the Strait has put further spotlight on CPI and PPI this week after a weak September payrolls figure reduced Fed-hike odds to around 48% from over 60% pre-report. A soft inflation print alongside concrete Hormuz progress would reinforce the case for a Fed hold, while higher inflation or a breakdown in talks could quickly revive rates and energy volatility and weigh on cyclical names, namely tech, which has been heavily reliant on debt issuance to fund the AI infrastructure buildout. The biggest swing factor today remains US-Iran developments ahead of tomorrow’s inflation data.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index held steady overnight near the 99.70 level as oil price and yields maintained their ranges as well. September rate hike odds have moved closer to a coin flip, as traders await any US-Iran developments and Wednesday’s CPI print. Positive developments on the US-Iran front are likely to weigh on the dollar, though without a material resolution to reopen shipping, the dollar is likely to maintain underlying support from the safehaven bid. As for tomorrow’s data, consensus forecasts expect a 0.2% MoM core print and a modest easing in the annual rate to 2.5%. A hotter print would quickly rebuild near-term hike pricing and support a look above the 100 level. The low-hire, low-fire regime is likely to keep expectations of a hike within the next four meetings intact, with the labor market acting as a non-factor in the Fed’s decision despite July’s sluggish hiring. Near-term guidance on the labor will shift to weekly claims data, which has remained remarkably low. However, a pickup in claims toward the 300,00 – 400,000 level would warrant recessionary worries.

Watch point: With July’s meeting being taken as dovish and a weak hiring report for July, ECB-Fed policy expectations are likely to favor the EUR unless US inflation data shows underlying price pressures remaining firm.

EURO: The euro is little changed at $1.1538. The eurozone calendar is relatively light this week. Second estimate Q2 GDP data on Friday will be the main release, leaving price direction tied to US-Iran developments and US inflation data, which could shape Fed policy expectations and influence the ECB-Fed expected policy spread. Money market are pricing a 85% chance of a hike in September, which has widened against September pricing for a hike at the Fed since the Fed’s latest meeting. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction and fresh off today’s data favors the upside for the EUR in the near-term. Traders are pricing around 41 bps of further ECB tightening this year, up from 37 bps on Friday.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is little changed at $1.3498. The main event of the week is tomorrow’s US inflation data and first estimate UK Q2 GDP data on Thursday, which is expected to show a slowdown from Q1’s 0.6% quarter-on-quarter growth, partly reflecting disruption from the Iran conflict and higher energy costs. June industrial production and trade data will arrive alongside GDP, providing detail on whether weakness is concentrated in manufacturing/trade or more broadly based. Currency markets have been largely muted to start the week, signaling that traders are unwilling to place bets on upcoming developments as US-Iran talks remain uncertain with conflicting reports. Markets are less confident that the Bank of England will raise rates this year compared to the ECB. The BoE largely awaits further data to assess inflationary pressures and weigh a potential rate hike. Investors are pricing in 25bps of tightening by year-end.

JAPANESE YEN: The yen is little changed at 159.27 yen per dollar. Recent support from US-Japan intervention has faded from reaching a three-month high of 155.20. This week is Japan’s Obon holiday period,  leading to reduced market participation and lower liquidity, which could increase the risk of sharp market moves during thin trading activity. This leaves the risk of a sharp deprecation in the yen if tomorrow’s US inflation data comes in stronger-than-expected. Monday’s Summary of Opinions from the Bank of Japan highlighted growing risks of accelerating inflation, with one board member suggesting the pace of interest rate hikes could quicken. Governor Ueda had flagged greater upside inflation risk and left open the prospect of a faster hiking cycle at the latest meeting. However, a shift in fundamentals is needed to fully reverse the weakening trend in the yen as the country’s large debt overhang and Taikichi’s expansive fiscal policies, including her favoring a weaker yen, are structural problems that are unlikely to buck the trend.  Market expectations of a September rate hike are priced at 52%.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie gained 0.18% to $0.7067. The Reserve Bank of Australia held rates and retained a hawkish bias saying it stands willing to raise rates if inflation pressures do not subside. The board noted inflation was too high, but that the economy was slowing as expected in the face of tighter policy. Investors are pricing an 18% chance of a hike in September. Markets imply around a 40% chance of a hike in November, from just over 50% ahead of the decision, and see 17 bps of tightening by the middle of June 2027. The dovish element from the meeting came from the bank’s reference to falling house prices and weaker housing credit, which could potentially raise the bar for further tightening. Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates this year after second-quarter inflation came in below forecasts.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields edged lower across the curve in a tight range overnight as oil prices held firm while US-Iran negotiations offered little clarity for markets, leaving traders to stay on the sidelines ahead of tomorrow’s inflation data. The low-hire, low-fire regime is likely to keep expectations of a hike within the next four meetings intact, with the labor market neither pressuring the Fed to lower or raise rates. Despite the worry over July’s reading, the breakeven pace of job gains is fairly lower than in previous years as noted by some Fed officials. That should leave near-term guidance on the labor to shift to weekly claims data, which has shown little stress as claims remain low. However, a pickup in claims toward the 300,00 – 400,000 level would warrant recessionary worries and revive rate cut expectations, though that prospect does not appear on the horizon.

A benign CPI print could help ease fears about Fed Chair Warsh and the central bank being dovish, which should also help bring longer-end rates lower. Despite the reduction in money market pricing, the risk of a September rate hike remains present, at least ahead of Wednesday and Thursday’s data. ISM’s recent PMI data for July showed that the prices indexes for the services and manufacturing sector remain materially elevated above pre-war levels, which points to the risk of above-consensus inflation readings this week.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term, while Friday’s report has raised concerns that a slow labor market may be emerging.

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