US Dollar: Inflation data guide blackout repricing – BNY

BNY's Geoff Yu observes that strong U.S. employment figures have increased the likelihood of a September Federal Reserve rate hike to approximately 60%, making rate expectations heavily reliant on incoming data as the Fed enters its blackout period. The upcoming August Consumer Price Index (CPI) report will be crucial in determining whether markets either strengthen or reverse the renewed tightening expectations.

The recent surprise in U.S. payrolls, with nonfarm payrolls at 162,000 compared to the expected 55,000, has pushed market-implied odds of a September Fed hike up from 50% to around 60%, demonstrating how closely rate expectations are tied to data. As the Fed enters its two-week communications blackout, the focus of this holiday-shortened week will be on inflation data.

The most important release this week is the CPI, particularly the core measure, which will help determine if last week's robust job growth is seen as evidence of persistent demand or just an isolated labor-market anomaly. A strong CPI print would likely support the case for a September hike and potentially continue the recent rise in short-end rates, while a weaker CPI would provide markets with a chance to reduce some of the increased tightening odds, especially with the Fed unable to influence the narrative.