US Inflation Hits 9.1%

US June 2022 CPI

Wednesday 13th July 2022 saw the release of US CPI (inflation) data, with the release being very closely watched by the market, as the major macroeconomic story of recent months has been accelerating global inflation which was initially described by the Federal Reserve as “transient”. This is the second consecutive month in which US inflation data has exceeded expectations, with economists expecting an annualized rate today of about 8.6% to 8.8%, while todays data shows inflation running at 9.1%. This is the highest inflation seen in the USA since 1981.

It was expected that the June 2022 CPI data would show no significant increase in the headline annual rate from 8.6%, but earlier this week the White House warned of an overshoot, managing expectations. The month-on-month CPI increase was 1.3%. Tellingly, the core CPI, which is arguably a more accurate meter of underlying inflationary pressures, also overshot expectations, coming in with a month-on-month increase of 0.7% compared to the expected 0.5%. As has been the case in recent months, most of the increase in price can be accounted for by rising food and energy costs. However, other element account for just under half of the increase.

What will particularly worry analysts is that the inflationary increases do not seem yet to be slowing down, making it less likely that inflation is close to peaking. The Federal Reserve will note this and be more likely to hike rates by 0.75% or even 1.00% at its next meeting. Analysts had been expecting the Fed to decide to hike by either 0.50% or 0.75%. A 0.75% hike is seen as the most likely outcome as implied by market yields.

US CPI Market Impact

One and a half hours after the CPI data release, the following price changes were observed in key market barometers:

• US Dollar Index +0.52%

• US 2-Year Treasury Yield +3.36%

• S&P 500 Index -1.79%

• Bitcoin/USD -3.82%

Interestingly, the EUR/USD currency pair again touched parity following the release but seems reluctant to break down below $1.0000 due to strong buying at this level.

These initial market reactions are sizable if not excessively large. They suggest that today‘s CPI data is causing an expectation of a more hawkish tilt in the Fed’s monetary policy, boosting the US Dollar, Dollar Yields, and hurting risk assets priced in USD such as the major stock index, the S&P 500, and Bitcoin/USD.

What Does This Mean for Traders？

Todays data release is significant, as it is worse than had been expected within an already nervous, risk-off environment.

It is likely that the long-term bullish trends in the US Dollar and US Dollar short-term rates, notably the 2-Year Treasury, will continue.

In the Forex market, the currency pair best positioned for trading US Dollar advances is likely to be the USD/JPY currency pair.

The US stock market is already in a bear market, and todays data is quite likely to trigger a fall large enough to test recent lows over the coming days.

Todays CPI data release is likely to give traders an opportunity to trade in the direction of the trend on news confirming the trend.