With the release of the US Consumer Price Index (CPI) in August, the market has no more “dovish” illusions about the Federal Reserve (Fed). Foreign exchange contracts fully priced a 3-yard Fed rate hike in September and, more surprisingly, a 20% chance of a 4-yard (100 basis point) rate hike next week. At the same time, Nomura Securities directly raised its forecasts, believing the Fed will raise interest rates by 4 yards next week.
The latest data released on Tuesday (13) by the US Bureau of Labor Statistics showed that the annual CPI growth rate in August was 8.3%, higher than the market expectation of 8.1%, and pre-delivery value fell slightly from 8.5% excluding food and energy volatilities Core CPI increased 6.3% year-on-year, higher than market expectations of 6.1% and the previous value of the 5.9%. On a monthly basis, the August CPI rose 0.1%, higher than expected -0.1% and the previous value was 0%, while the core CPI rose 0.6%, higher than expected. of the market and at the previous value of 0.3%.
The data indicated persistently high and widespread inflation, raising the possibility that the Fed will stick to an aggressive tightening policy for longer than expected.
Nomura economists predicted that the Fed could raise interest rates by a full percentage point next week, adding that inflation in basic goods and services strengthened broadly in August, suggesting that a number of rising risks inflation could materialize, so they believe the Fed will respond with more force.
Nomura economists also predict that the Fed will raise interest rates by another 2 yards (50 basis points) in November and December, with a rate hike in December 25 basis points higher than previously expected. Additionally, Nomura’s forecast for the final rate is 4.5% -4.75%, 50 basis points higher than the previous one, assuming the expectation of a 1 yard (25 bp) rate hike in February 2023 remains unchanged.
Nomura economists also said this is a worrying report for the Fed that not only blocked a three-yard rate hike in September, but could also increase the risk of a three-yard rate hike in November.
For meetings after September, the market is estimating a 50% chance of a 3-yard rate hike in November and a 25% chance of a 2-yard rate hike in December. This means that the market is pricing the Fed rate of over 4% by the end of the year.
Investors are now fully convinced that the Fed will raise interest rates for the third consecutive time at its meeting on September 20 and 21 next week. The tightening cycle will come to an end in April next year when interest rates catch up. 4.28%.
The market expects the Fed to start cutting interest rates after the rate hike reaches its peak. After the CPI report, traders believed that a more aggressive rate hike by the Fed this year would lead to a recession and that it would have to cut rates more aggressively later. Markets expect the federal funds rate to fall below 3.8% by the end of next year.
Prior to maturity, according to CME data, investors in the interest rate futures market had a 76% chance that the Fed would raise interest rates by 3 yards next week and a 24% chance of a rate hike. by 4 yards.
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