US CPI Data Sparks Initial Rate Hike Expectations, Then Markets Reverse Course

The US Consumer Price Index (CPI) release did not discourage markets from anticipating a Federal Reserve policy shift. On the contrary, it initially boosted the likelihood, with traders pricing in a less than 90% probability of a September rate increase.

The month-over-month CPI registered 0.4%, while the annual figure stood at 3.4%. Core CPI rose 0.3%, surpassing the 0.2% forecast, though the year-on-year core rate held steady at 2.4% from the previous month. The super core month-over-month CPI came in at 0.51%, significantly higher than last month's 0.1%. On an annual basis, super core inflation increased to 3.01% from 2.83%.

"Supercore CPI" is an unofficial gauge of underlying inflation that targets services prices excluding housing costs.

It typically excludes:

• Food
• Energy
• Goods
• Housing or shelter

This leaves services like healthcare, transportation, insurance, recreation, education, and personal care.

Why does it matter? Many of these services are labor-intensive, meaning their prices can signal wage pressures. If supercore inflation stays high, it suggests inflation is becoming entrenched in the service sector and may prove difficult for the Federal Reserve to curb.

It is important to note that supercore is not a standardized, official CPI category. Analysts may compute it differently. The Fed often focuses more on the comparable core PCE services excluding housing measure.

In simple terms: Supercore inflation aims to capture the portion of inflation that may be most persistent—the kind that does not fade quickly when energy costs drop or supply chains improve.

The US dollar initially rallied following the report but has since pared those gains.

GBPUSD: The pair fell to test the 50% midpoint of the recent upward move from the late July low (July 28), at 1.34732. That level also corresponded with lows from last week and from August 13. The price bounced off that support and is now trading back above 1.3500 after the successful test. Resistance sits at the 200-hour moving average of 1.35246 and the 100-hour moving average of 1.35360.

USDJPY: The pair rose on the news but has since reversed, hitting new lows for the day. It is now back below the 100-hour moving average, which had acted as a level of resistance in the decline ahead of today's report. Falling below that level signals a bearish bias.

EURUSD: The pair dipped below the swing area target of 1.15849 and briefly traded under the 38.2% Fibonacci retracement of the rally from the July 28 low at 1.15738. It has since recovered, moving back above these levels and currently trading around 1.1600. A cluster of resistance remains above, including the 200-hour moving average at 1.1613, the 100-hour moving average at 1.1623, and the 200-day moving average at 1.16316.

US futures are showing stronger gains, with the Dow up more than 500 points and the Nasdaq up over 300 points.

• S&P is up 70 points
• Dow industrial average is up 517 points
• NASDAQ is up 340 points

US Treasury yields are mixed, with the yield curve flattening as short-term rates rise and long-term rates decline:

• 2-year: 4.5767%, up 2.7 basis points
• 5-year: 4.7262%, down 0.7 basis points
• 10-year: 4.924%, down 2.0 basis points
• 30-year: 5.3328%, down 2.8 basis points

The main takeaway is that selling pressure is focused on the short end, while buyers are stepping into longer-dated Treasuries. The 10-year yield remains elevated near 5%, and the 30-year yield is still above 5.30%.

The price action is somewhat unexpected and may have taken traders by surprise.