US Inflation Quick Analysis: Warming core cools markets, tensions to keep USD bid through Fed

"It ain't over until the fat lady sings" – the inflation opera is still on and running hotter than expected. The US Core Consumer Price Index (Core CPI) rose by 0.3% in August, beating estimates of the 0.2% increase seen in the prior two months. This slight acceleration should keep markets nervous, at least until the Fed sings its tune on September 20. 

While yearly core inflation slowed to 4.3% as expected, one "core of the core" measure is up. Services inflation excluding housing rose by 0.5%, showing wage-related inflation remains sticky. To bring it down, the Fed would have to increase rates further. 

Markets expect that Fed Chair Jerome Powell and his colleagues will leave borrowing costs unchanged next week, but the jury is out about a hike in November. Another reason for investors to worry stems for stubborn house prices. Higher rates initially had a substantial cooling effect via surging mortgage rates, but property prices seem to have found their base. 

The US Dollar initially advanced in response to the hotter Core CPI monthly reading, but then whipsawed to the other direction. This reaction results from positioning toward a strong figure and a classic "buy the rumor, sell the fact" response. When the dust settles, I expect the Greenback to gain ground, while Gold and stocks are likely to suffer some pressure. 

When would equity markets return to rally? It would take softer inflation data – or an unlikely "all clear" from the Fed – to pop the champagne bottles. 

What about a massive decline? That would require either super-hot inflation, which we have not seen, or a surprising rate hike on September 20, also unlikely. 

The most likely scenario is market unease – at least for another week.