US Inflation Analysis: Data cements end of hiking cycle, markets may take time to reflect it

Buy the rumor, sell the fact? That seems to the name of the inflation report game – at least in the short term. The US Dollar has been rising after an initial drop, as it had already declined beforehand, anticipating weak data.

What is the state of American inflation? For the general media and the average American, things are getting marginally worse – prices are up 3.2% in July vs. 3% in June. The price at the pump has bottomed out and there are reasons to be worried. For markets, the story is different.

Investors and the Federal Reserve may find significant solace in another decline of the Core Consumer Price Index (CPI). It slid from 4.8% to 4.7% YoY, missing estimates of remaining unchanged. This minor change – while the monthly change came out at 0.2%, bang on expectations – lowers the chances of a rate hike in Septmber. 

While stocks have been in a "sell the rally" mode in August, the data provides reasons to be cheerful. Other measures of underlying inflation, such as those excluding homes and other data, are also on the back foot.

Moreover, jobless claims edged up to 248,000 in the weak ending on August 4. That is a "Goldilocks" number – not too hot, nor too cold, indicating a cooling, yet not sinking labor market. 

All in all, while stocks may struggle to end the day in positive ground, and there is still another CPI and another jobs report until the Fed's September decision, there is room for optimism.

The soft landing narrative is alive and kicking for a few more weeks.