Morning Bid: Diesel the real spoiler for US inflation doves

The real culprit behind the current U.S. inflation concerns appears to be diesel fuel, rather than expectations of economic growth. Diesel prices reached record highs last week, posing a significant threat to transport, shipping, farming, and manufacturing sectors. This issue weighs heavily on the upcoming August U.S. Consumer Price Index report, as any increase in core inflation above 0.2% would push pressure on the Federal Reserve to raise interest rates this month.

Fed funds futures indicate a 57% chance for a September hike, a 70% probability for October, and a full pricing for a December increase. President Donald Trump has threatened to cut off trade with countries running a trade surplus with the United States if the Federal Reserve does not slash interest rates, which he desires. Meanwhile, Europe faces its own set of challenges with the Alternative for Germany (AfD) party gaining prominence in state elections in Saxony-Anhalt, though it still falls short of a majority.

The euro is stable at $1.1608, but German government bonds might face pressure if the AfD appears set to assume power. The European Central Bank (ECB) is expected to raise interest rates to 2.50% during its meeting on Thursday, with market consensus suggesting this will likely be the final increase of the cycle. Nonetheless, analysts are pricing in at least a 2.75% hike.

The dollar remains steady at 156.21 yen, having dropped over 2% last week due to speculation of a more hawkish Bank of Japan stance. Significant market-moving developments scheduled for Monday include the EU Sentix investor confidence index for September and the final Q2 GDP and employment figures.