U.S Inflation data takes spotlight

Markets began the week with mild optimism as investors searched for evidence that the Federal Reserve will reduce interest rates in September.

Investors’ primary concern remains U.S. interest rates, thus the most important economic data point will be Wednesday’s consumer price data. Federal Reserve Governor Michelle Bowman softened her typically hawkish tone by praising some additional “welcome” progress on inflation over the last few months. Nevertheless, she added that inflation is still “uncomfortably above” the central bank’s 2 percent target.

The Federal Reserve maintained the policy rate at 5.25 percent to 5.50 percent at the end of July, unchanged from the previous year.

However, the Fed hinted that if inflation continued to decline, a rate cut might occur as early as September. With projections indicating that annual core inflation will drop slightly to 3. 2 percent, the lowest level since April 2021, July’s CPI data is anticipated to demonstrate that inflation has been gradually approaching the Fed’s 2 percent annual target.

Treasury yields increased on Monday

The yield on the 10-year Treasury increased to 3.9647 percent, up more than two basis points. The 2-year Treasury note recently increased by more than two basis points to 4.0817 percent.  Prices and yields move in opposite directions as long as uncertainty regarding this week’s release of new inflation data.

Investors will be closely monitoring the inflation data in light of recent worries about whether the U. S. whether a recession could hit the economy and if a hard landing could have been prevented by the Federal Reserve lowering interest rates earlier.

The Fed left rates unchanged at its meeting last month, but it made hints that a September rate cut might be possible based on signals from economic data regarding inflation and the labor market.

Fears of a recession were stoked by a weaker-than-expected jobs report that followed, but they were somewhat dampened by the most recent weekly initial jobless claims data, which came in lower than anticipated last week

Markets are pricing in a 100% chance of a September rate cut from the Fed, but traders were last divided on the extent of the cut, according to the FedWatch tool from CME Group. Retail sales data for July are also anticipated this week, and they may offer more insights into the health of the economy