Last week inflation gave more hope to the optimistic that it is now even below the lowest estimates. This resulted in further rallies in equities and a fall in dollar and bond yields.
Though services continued to provide positive contributions to CPI, the impact of it reduced thanks to transportation-related reduction. On the flip side, energy stopped being a drag on a monthly basis. The top positive contributor remained the home rentals.
This trend of data was observing positive reactions in all markets except the rate swap market where the odds of a rate hike in the July meeting remained above 90%. It means that the current inflation will not impact how Federal Reserve looks at the rate trajectory.
But given such relief in inflation and still a strong labour market, can they postpone the rate hike to September? Though only 9 days are left for the policy meeting and the Fed blackout period started on Saturday. It is going to be a big unknown with a small possibility.
From the inflation trajectory point of view, July and August are low points before the pick-up in September as festival demand kicks in. But will this be different as retailers have inventories? The larger question is what will the consumers do with the excess savings they have this festival season. According to JP Morgan, they are estimated to finish them by Christmas.