Markets Brace for CPI Amid Trump-Harris Debate
As markets await today's Consumer Price Index (CPI) data from the US, attention has shifted to the debate between Republican candidate Donald Trump and Democratic candidate Kamala Harris, who are set to face off in the November elections. The candidates expressed differing views on foreign policy and debated topics such as the economy, taxes, immigration, and women's health.
The focus of the foreign policy discussions was tariffs on China. Trump promised to impose a 60% tariff on Chinese products. At the same time, Harris argued that this policy would be detrimental to American consumers, adding that increasing tariffs on China would complicate the Federal Reserve’s (Fed) efforts to lower inflation.
Markets are pricing in Harris's better-than-expected performance; Harris's victory odds have risen to around 55% on PredictIt. Pressure on the US dollar has increased slightly following the debate, but the impact on the markets is likely to remain limited due to the unresolved uncertainty surrounding the elections.
Meanwhile, market participants continue to debate whether the upcoming August CPI data, the last major data point before next week's Fed policy meeting, will influence the extent of rate cuts. Futures markets are pricing in a 65% probability of a 25 basis point rate cut, while those betting on a 50 basis point cut remain a significant minority at 35%.
Economists predict headline CPI will drop to 2.6%, while core inflation is expected to remain steady at 3.2%. Inflation figures of this magnitude are likely to push the Fed towards a 25-basis-point cut. However, any downside surprises could rekindle expectations for a 50-basis-point cut.
On the other hand, a report published by Goldman Sachs highlights that the downside risk to the US dollar from expected Fed rate cuts could be limited as other major central banks are also beginning their easing cycles.
Later in the week, markets will watch the US Producer Price Index for clues about future inflation trends. Expectations regarding inflation could influence forecasts for the total extent of the Fed's rate cuts this year.
Gold Nears $2,525 on Lower Yields and Fed Rate Cut Hopes
Despite recent US labor data being interpreted as normalization by Fed officials, markets are still maintaining bets on at least one jumbo rate cut by the Fed this year due to ongoing concerns that the slowdown will continue. Markets are currently pricing in a 30 basis point cut for the September meeting and a total of 110 basis points in cuts by the end of the year.
The persistence of large rate cut expectations is serving as a tailwind for the continued decline in US Treasury yields. Yields on the 2-year Treasury have fallen to 3.57%, while the benchmark 10-year yields have dropped to 3.62%.
Lower yields are positive for gold, which offers no yield. Moreover, bolstered by the US presidential debate, gold prices have surged toward the $2,525 level.
If today’s CPI data supports expectations for front-loaded rate cuts by the Fed, it would signal a new all-time high for gold.
Declining Oil Prices May Help Ease Inflation and Support Central Bank Easing Policies
USOIL prices have dropped to $66 for the first time since March 2023, driven by growing concerns over global demand. These concerns stem from slowing economic activity in key regions like China, the US, and the Eurozone.
Many economists suggest that crude oil may drop toward $60 per barrel by 2025. The anticipated decline in oil prices is likely to have a positive impact on market sentiment.
Rising crude prices were a major contributor to the inflation crisis following the pandemic. Therefore, falling oil prices would be a supportive development for major central banks preparing for monetary easing.
According to Bloomberg Economics, if the expected drop in oil prices materializes, it could reduce inflation rates in the US and Europe by 0.4 percentage points. Meanwhile, as global recession risks remain a topic of concern, this development offers a glimmer of hope for global growth.