The USD rates space is now firmly focused on the labour market as CPI readings stayed cool. CPI readings were in line with consensus (0.2% MoM for both headline and core CPI). More importantly, July’s data represents the third consecutive month that readings were mild (0.2% MoM or less). From an inflation perspective, the Fed should be lowering rates imminently, however, the pace and extent would probably be dictated by the state of the labour market and the state of the US consumer. USD rates were positioned for a weak inflation print and rose modestly post data release. Attention will shift to jobless claims figures and retail sales figures tonight. Claims provide a more timely read of the economy compared to NFP which is only released once a month. There are concerns that job seekers are now taking a longer time to get employed leading to a rise in continuous claims. Similarly, retail sales (consensus: 0.4% MoM) would provide direction on the state of the US consumers. Rates are more cautious on the state of the economy. Even as sentiment has rebounded, the market is still factoring in more than 100bps of cuts in 2024 and an additional 125bps in 2025. This could represent some of the scarring from the VAR shock that took place almost two weeks ago. In the absence of financial stresses or material labour market weakness, cuts of that pace and magnitude do not seem likely.
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