A hotter US inflation print should typically lift the USD, but the increasingly complicated policy backdrop could limit its gains. Tomorrow’s headline CPI is expected to rise by 0.4% MoM in August, up from 0.1% in July, while core inflation is forecast to hold at 0.2%. Before entering the blackout period, Fed officials were divided over whether to raise rates at next week’s FOMC meeting.
The case for tightening has strengthened following the stronger-than-expected nonfarm payrolls and Brent crude’s return above USD100 per barrel for the first time since July. Markets have raised the probability of a Fed hike to 65% from 51% last Thursday. However, the source of inflation matters. Resilient demand would offer a clearer justification for higher rates. An energy-driven squeeze represents a harder choice, potentially requiring the Fed to contain inflation expectations while adding pressure on growth,
A credible Fed response could support the USD and ease longer-term inflation concerns. However, higher Fed rates would not necessarily resolve the pressures unsettling the long-dated US Treasuries. The US 30Y yield rose 4.3 bps to 5.29% despite US Treasury Secretary Scott Bessent’s announcement to triple bond buybacks to USD6 bn per operation, above the August 18 pledge of at least USD4 billion in the current quarter.
The rise in yields suggests that the larger buybacks have yet to provide lasting reassurance. Buybacks can support market liquidity, but their ability to offset persistent concerns about inflation and the fiscal outlook is more limited. Markets continue to face uncertainty over how Fed monetary tightening and Treasury debt management will interact. President Donald Trump’s call for rate cuts, despite stronger nonfarm payrolls, adds to that uncertainty. His suggestion that the Iran conflict will end and oil prices will fall after the November 3midterm elections offers little comfort.
Overall, this leaves room for near-term limited USD gains, an opportunity for markets to get back into the underlying USD debasement trade. Markets are reading Bessent’s push to stabilize the JPY by reframing and leaning into “Takaichinomics” as an attempt to manage US long-term borrowing costs through diplomatic and monetary policy pressure abroad rather than tackling domestic structural fiscal deficits.
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“Keep your face always toward the sunshine – and shadows will fall behind you.”
Walt Whitman
Today in history
Switzerland, traditionally a neutral country, officially became the 190th full member of the United Nations on September 10, 2002.
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