US rate cuts in view after tame CPI report

The prospect of looming US rate cuts was back on the front burner after an inflation report, which had kept markets on edge ahead of its release, showed a tame reading.

Wednesday’s consumer price index showed a moderate rise in July with the annual increase in US inflation slowing below 3% for the first time in nearly 3-1/2 years.

Following the July CPI data, the question investors seemed to be debating was not whether the Fed would cut rates at its Sept. 17 to 18 meeting, but by how much. Traders appeared to be leaning toward a more modest 25 basis point cut, but 50 bps was not ruled out. Nearly 40% odds were put on the bigger cut in September, according to CME FedWatch. The Fed’s annual Jackson Hole gathering, set for Aug. 22 to 24, will give Chair Jerome Powell a chance to fine-tune his rates message ahead of the meeting.

Much more US economic data also will arrive in the coming weeks, starting on Thursday with the monthly retail sales report and the weekly jobless claims data. The reports are likely to receive even greater scrutiny given the weak employment data at the start of August that sparked some concerns about a potential recession.

That employment data also was a catalyst for a bout of severe volatility and equity downside to start August, but markets seemed to be moving further and further from those wild swings.

The S&P 500 ended up 0.4% on Wednesday after the tame CPI report, with the benchmark index now down less than 4% from its all-time high reached in July. The Cboe Volatility index continued to recede, ending at just over 16 on Wednesday after shooting above 65 on Aug. 5.

In another sign of revived animal spirits on Wednesday, candy giant Mars was set to buy Cheez-It maker Kellanova for nearly USD 36 billion, in the year’s biggest deal to date.

Rate cuts were gripping other regions as well. New Zealand’s central bank slashed its benchmark rate for the first time since March 2020 and flagged more cuts over coming months.

Elsewhere, GDP data was expected on Thursday for Japan, as investors in the country were still digesting news that Prime Minister Fumio Kishida will step down in September.

Meanwhile, China is set to release a spate of data, including retail sales. A number of gloomy reports have dulled expectations for China’s economic performance in July.

Here are key developments that could provide more direction to markets on Thursday:

– China industrial output, retail sales (July)

– Japan GDP (Q2)

– US retail sales (July)

(Reporting by Lewis Krauskopf; Editing by Josie Kao)