Markets Quiet Ahead of Inflation Data

MACRO FRAME

July’s payrolls have put September Fed hike expectations in doubt ahead of Wednesday’s inflation data, though a hot print could restore expectations.

STOCK INDEX FUTURES

Equity index futures were mixed overnight after the S&P 500 closed at a fresh record on Friday. Resilient earnings and AI-led growth optimism have so far played a larger role in price action against unresolved Strait of Hormuz tensions ahead of US inflation data later this week. Iran says it is close to a shipping-lane arrangement with Oman, which could eventually ease energy flows and oil-led inflation pressure, but reopening remains conditional on additional US concessions and transit is still severely constrained. The earnings backdrop remains supportive, 85% of S&P 500 reporters have beaten expectations so far and JP Morgan has raised its year-end index target to 8,000. The reporting calendar is lighter this week, with Applied Materials and Cisco among the notable names. This puts attention on CPI/PPI this week after weak payrolls cut September Fed-hike odds to around 44%. A soft inflation print alongside concrete Hormuz progress would reinforce the case for a Fed hold, while higher inflation or a breakdown in talks could quickly revive rates and energy volatility.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index steadied near 99.72 overnight, close to a two-month low following July’s payrolls data, which has prompted traders to cut September Fed‑hike odds to around 50% from roughly two‑thirds a week ago. That puts Wednesday’s CPI at the center of the week: consensus looks for 0.2% month‑on‑month core inflation and a modest easing in the annual rate to 2.5%, but a hotter print would quickly rebuild hike pricing and support the dollar. The low-hire, low-fire regime is likely to keep expectations of a hike within the next four meetings intact.

Watch point: With July’s meeting being taken as dovish and a weak hiring report for July, ECB-Fed policy expectations are likely to favor the EUR unless US inflation data shows underlying price pressures remaining firm.

EURO: The euro is 0.10% lower to $1.1547. The eurozone calendar is relatively light this week. Second estimate Q2 GDP data on Friday will be the main release, leaving price direction tied to US-Iran developments and US inflation data, which could shape Fed policy expectations. Money market are pricing a 82% chance of a hike in September, diverging sharply against September pricing for a hike at the Fed. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction and fresh off today’s data favors the upside for the EUR in the near-term. European spot crude prices are likely to keep bond yields and tightening expectations elevated, unless a credible flow of tanker traffic through the Strait is maintained. In the event of a peace deal between the US and Iran, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated compared to pre-war levels.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is little changed at $1.3491. The main event of the week is first estimate Q2 GDP data on Thursday, which is expected to show a slowdown from Q1’s 0.6% quarter-on-quarter growth, partly reflecting disruption from the Iran conflict and higher energy costs. June industrial production and trade data arrive alongside GDP, providing detail on whether weakness is concentrated in manufacturing/trade or more broadly based. Markets are less confident that the Bank of England will raise rates this year compared to the ECB. The BoE largely awaits further data to assess inflationary pressures and weigh a potential rate hike. Investors are pricing in 25bps of tightening by year-end.

JAPANESE YEN: The yen is 0.68% weaker at 158.84 yen per dollar. Monday’s Summary of Opinions from the Bank of Japan highlighted growing risks of accelerating inflation, with one board member suggesting the pace of interest rate hikes could quicken. Governor Ueda had flagged greater upside inflation risk and left open the prospect of a faster hiking cycle at the latest meeting. However, a shift in fundamentals is needed to fully reverse the weakening trend in the yen as the country’s large debt overhang and Taikichi’s expansive fiscal policies, including her favoring a weaker yen, are structural problems that are unlikely to buck the trend. Market expectations of a September rate hike are priced at 55%.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie slipped 0.16% to $0.7055 ahead of the Reserve Bank of Australia’s policy meeting on Tuesday, where rates are expected to be left on hold. Still, any hawkish language or signals from the bank are likely to add to market expectations of potential tightening later this year.  An increase in risk-sentiment across the globe and strong consumer spending data in Australia has lifted the Aussie above the $0.70 level in recent days despite market expectations of a year-end rate hike remaining dull. While some recent data has supported the Reserve Bank of Australia’s hawkish stance, Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates. Second-quarter inflation in Australia came in below forecasts, the downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets  see a 17% chance of a move higher in rates at the September meeting, and are pricing the chance of year-end hike just under 50%.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields edged higher across the curve in a tight range overnight as markets assessed developments regarding the Strait and awaited inflation data later in the week. A benign CPI could help ease fears about Fed Chair Warsh and the central bank being dovish, which should also help bring longer-end rates lower and flatten the curve. Despite the futures market shift, a number of economists still think the path toward higher rates remains. Still, while the July report and the downward revisions to prior months has reignited some concerns over labor market stability, Fed officials have in recent months have indicated that the breakeven pace of job gains is fairly lower than in previous years. That dynamic likely means that Friday’s labor report may not have moved the needle much for the Committee, which is more focused on inflation data and still retains a hawkish bias.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term, while Friday’s report has raised concerns that a slow labor market may be emerging.

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