The disinflation trend is unfurling but not quick enough for the 50 mission rate cut crew

"While today’s data doesn’t throw cold water on a September rate cut, those banking on a heftier reduction might find their hopes a bit stretched."

Wednesday's CPI readout played another soothing note in the ongoing symphony of mild inflation tunes, marking a quartet of months with subdued price hikes. This latest installment confirms the disinflation trend is indeed unfurling, albeit with the sluggish grace of a snail—contrasting sharply with the market's more vigorous applause for the recent drop in producer prices.

The CPI's more granular "supercore" metrics, which strip out volatile elements to give a clearer view of underlying inflation, also showed restraint. Core services CPI, excluding shelter costs, nudged up by a modest 0.21% last month, mirroring a similar uptick in core services when excluding owner's equivalent rent (OER) and rent. These figures suggest a controlled inflationary environment but perhaps not the perfect disinflation sweet spot rate cut optimists and dollar bears hoped for. Still, it provides a moderating interpretation of the Fed's favoured inflation gauge( PCE), released at the month's end.

Market vibes across the board—stocks tiptoeing up, gold taking a dip, and the dollar just meandering— hint that traders are pivoting from their inflation-focused playbook to the oft-overlooked employment side of the Fed's dual mandate.

It's all eyes on employment now; with the July jobs report flipping the script, we're no longer solely on inflation watch. Now, the spotlight is squarely on labour data. This unfolding narrative will be the compass guiding the Fed's next steps. Will they throttle up the rate-cut engine or hit the brakes on a potential 50-bp hike? Stay tuned as the labour market waltz now leads the dance on Wall Street!

The latest CPI and PPI data rounds have been neatly unpacked, giving us a crystal-clear preview of what to expect from the upcoming month-end PCE report, the Fed preferred gauge. Both indicators came in at or slightly below expectations, stoking the fires for the anticipated rate cut in September. The main question remains: Will it be a modest 25 bps trim or a more aggressive 50 bps chop?

Though we're not quite hitting the Fed's inflation sweet spot yet, burgeoning consumer pressures are indeed putting the Fed in a tight spot. Moreover, the recent uptick in unemployment—creeping above four percent—is alarming. We'll soon see if the recent uptick was just a temporary blip from the hurricane disruptions in Texas. This sets the stage for the next Non-Farm Payrolls (NFP) release, which could set the market alight.

The intensity of the Fed's upcoming rate cut is suspended in a delicate balance, with all eyes on the impending jobs data. As new employment figures come to light, they will tip the scales, shaping how aggressively the Fed wields its rate-cutting scissors.

The Bottom Line: Today's CPI report was a mixed affair, coming right down the pike. On one hand, services and housing inflation held firm, but on the other, we saw noticeable weakness in discretionary spending like airfares and vehicle purchases. This paints a picture of gradual progress toward the Fed's inflation targets, with promising signs that inflation might ease further, especially since services and housing costs typically trail off after discretionary goods prices dip. While today’s data doesn’t throw cold water on a September rate cut, those banking on a heftier reduction might find their hopes a bit stretched.

Off to Jackson Hole we go, where Chair Powell's spotlight gig might just turn the usual market jitters into a full-blown nail-biter. Everyone’s gearing up to parse each syllable, bracing for potential market shakes that could follow his every utterance. Fortunately, Powell has become a maestro of central bank-speak, sticking to his script with the precision of a sharpshooter. But let's not forget that in this era of AI-driven news snippets and trigger-happy trading algorithms, even a whiff of off-script excitement could stir up some serious market froth.