Federal Reserve: Rate hike path and data support – Deutsche Bank

Deutsche Bank’s Jim Reid and team say the Fed’s decision on Wednesday is the main market event, with their economists expecting a 25bp hike to 3.75%-4.00% and now forecasting 75bps of hikes over the next seven months. Recent US CPI and PPI data are seen as hawkish, and retail sales are expected to rebound, supporting a firmer policy stance.

Hawkish data back tightening path

"Delving into more detail now and the main event for markets will be the Fed’s decision on Wednesday. Our economists have long expected a 25bp rate hike with the market now at 87% this morning up from around 35% two Fridays ago just before Warsh's Jackson Hole speech."

"They have also added an extra hike in March to their forecast which now makes it 75bps of hikes over the next 7 months."

"Friday’s inflation data strengthened the case for action this week. Core CPI rose by 0.29% in August, a touch above expectations and up from 0.22% in July."

"Meanwhile, last Thursday’s PPI report contained hawkish elements, including stronger hospital and international airfare prices. Combining the latest CPI and PPI data, our economists estimate August core PCE increased by 0.27%, a pace they do not view as consistent with sufficient progress back towards the Fed’s inflation target."

"On Wednesday, August US retail sales are released and our economists expect a rebound to +0.9% month-on-month, following July’s -0.6% decline. They also forecast ex-auto sales at +0.6% and retail control sales at +0.3%, arguing that July’s weakness looked more like a temporary pause in consumer spending than the start of a broader slowdown."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)