Commerzbank’s Christoph Rieger argues that US CPI and Fed Chair Warsh’s testimony will shape Fed expectations over summer, with markets currently pricing roughly a 50/50 chance of a July hike and more than 25bp by September. The bank sees upside rounding risks to core CPI but doubts the latest Monetary Policy Report provides a template for an imminent rate increase.

CPI and testimony to steer Fed

"Rates: Today's US CPI and Warsh testimony could set the Fed course over summer. We see upside rounding risks to the crucial core number, but still chances for a front-end stabilisation after the numbers."

"All eyes will be on the US today, where the CPIs followed by Warsh's testimony look set to shape Fed expectations through summer, before France will take on Spain in the World Cup semis in Dallas. Volatility seems guaranteed after Waller highlighted the importance of the data and the market is pricing about a 50/50 chance for a hike this month."

"A decline of headline inflation can safely be expected thanks to lower gas prices. The crucial number will be the increase in the core index. The consensus and our economists expect +0.2%. The risks are that the number will be rounded up to 0.3% (our economists would go for 0.23%). However, considering the World Cup, an increase of 0.2% would probably be good news - and if we get a higher number, it will be important to establish whether this was driven by sub-components like lodging, transportation or restaurants."

"However, we don't think the latest report provides a template for an imminent rate hike. Notably, for the first time in years the report describes wage growth as "roughly consistent with 2 percent inflation over time", thanks to strong productivity growth."

"Forwards are currently discounting a probability of 46% for a 25bp rate hike this month (in two weeks) and more than 25bp are discounted by September. Unless today's CPIs show a surprise broadening in non-World Cup related core inflation pressures, chances look good that Warsh will not signal an imminent rate hike."

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