August U.S. core CPI rises more than expected month-on-month, raising the probability of a Fed rate hike in September

The U.S. Consumer Price Index (CPI) for August has been released. Data released by the U.S. Bureau of Labor Statistics on September 11 showed that U.S. CPI rose 3.4% year-on-year and 0.4% month-on-month in August; excluding food and energy prices, August U.S. core CPI rose 0.3% month-on-month, exceeding the market expectation of 0.2% and marking the largest monthly increase since April. After the data was released, market expectations for a Fed rate hike increased significantly.

Driven by rising energy prices, the U.S. Producer Price Index (PPI) for August also exceeded market expectations. On September 10, data from the U.S. Bureau of Labor Statistics showed that U.S. PPI rose 5.4% year-on-year in August, higher than the expected 5.3% and the previous reading of 4.7%.

Regarding August U.S. core CPI rising more than expected month-on-month, “this shows that inflationary pressures remain resilient, mainly driven by prices for services such as housing, communications, and transportation services, including airfares and hotel stays; goods inflation has eased somewhat, but services inflation remains stubborn, fueling concerns that the Fed may hike rates again.”

Data showed that core services rose 0.3% month-on-month in August (previous reading: 0.2%), with the rebound in shelter costs serving as the main driver of the monthly increase in core services. Shelter costs rose 0.3% month-on-month, accelerating further from 0.1% in the previous month.

The Fed will hold a monetary policy meeting from September 15 to 16. Will the meeting announce a rate hike?

The CME FedWatch Tool shows that the market currently sees a probability close to 90% that the Fed will raise rates by 25 basis points next week. The probability of two rate hikes at the September, October, and December monetary policy meetings is close to 70%.

If the Fed raises rates, what impact will this have on global markets?

Fu Yifu believes that if the Fed hikes rates in September, it will be negative for gold. As the dollar strengthens and real interest rates rise, the opportunity cost of holding gold will increase, potentially putting short-term pressure on gold prices. In addition, a Fed rate hike will increase volatility in global markets, but it is not a decisive factor.

However, Guolian Minsheng Securities pointed out that, for the market, a Fed rate hike does not necessarily mean continued downside pressure. If rate hike expectations are realized this year, combined with a weakening of the hawkish camp next year, a window for positioning in liquid assets may emerge after a short-term adjustment, potentially even creating room for expectations of rate cuts next year.

Normally, rising rate hike expectations would weigh on technology valuations. However, on September 11 U.S. Eastern Time, all three major U.S. stock indexes closed higher, with the S&P 500 Index rising 0.86% to 7656.98 points; the Dow Jones Index rising 0.98% to 52573.29 points; and the Nasdaq Index rising 0.96% to 26333.04 points.

Why did U.S. stocks rebound after the probability of a Fed rate hike increased? The market had already priced in relatively substantial rate hike expectations, and the implementation of a rate hike corresponded to a decline in the market’s uncertainty premium, creating a certain “bad news priced in” effect. For example, the Dow also began to rebound after the rate hike was implemented in June 2022. In addition, this CPI report contains some unsustainable components in its composition, pointing to a moderate rather than aggressive rate hike and helping the market rule out concerns about a worse scenario.

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