US Inflation Data Pushes Fed Hike Probability to 87%

The probability of a 25 basis point Federal Reserve rate hike next week rose to 87%. This shift followed the release of August US consumer price data. The market consensus had predicted a stable headline inflation rate. The actual figure matched that expectation exactly. However, the core monthly component came in hotter than projected. This specific data point altered trading sentiment significantly. Investors in New York responded with immediate buying pressure. Equity indices climbed across the board on Friday.

The S&P 500 index gained 1.1% on the day. The Nasdaq Composite surged by 1.3%. The Dow Jones Industrial Average added 1.0%. In London, the FTSE 100 rose 0.4% to close at 10,650.44. The FTSE 250 also increased by 0.4%. Despite these daily gains, the FTSE 100 recorded its worst week since July. The index fell 1.7% over the five trading days. The FTSE 250 dropped 2.5% for the week. European peers in Paris and Frankfurt both saw their major indices rise by 0.8% on Friday.

Inflation Figures Match Consensus Forecasts

The Bureau of Labor Statistics reported a 3.4% annual increase in consumer prices. This figure was identical to the July reading. Monthly inflation accelerated to 0.4% from 0.1% in the prior month. Analysts cited by GN markets/policy (en-US) noted the data aligned with market expectations. The core annual inflation rate, which excludes food and energy, cooled to 2.4%. This was down from 2.5% in July. The monthly core inflation rate rose 0.3%. Economists had expected a 0.2% increase. This discrepancy drove the shift in rate hike probabilities.

Bond Yields and Currency Movements

The yield on the 10-year US Treasury reached 4.93%. This level was higher than the 4.92% seen previously. Earlier in the day, the yield peaked at 4.99%. This marked the highest level since 2023. The 30-year Treasury yield narrowed to 5.32%. Sterling traded at 1.3523 US dollars on Friday. This represented a slight decline from 1.3532 dollars on Thursday. The euro weakened to 1.1605 dollars from 1.1625 dollars. The dollar strengthened against the Japanese yen to 153.58. It had been at 154.10 yen the previous day.

Bankers Debate the Hiking Cycle

Barclays analysts maintained their call for a September rate hike. They argued the data supports a 25 basis point increase. ING described a potential hike as a recalibration move. The Dutch bank does not expect a sustained cycle of hikes. Oxford Economics analysts view the decision as uncertain. Bernard Yaros noted the Fed’s preferred inflation measure may prove benign. This suggests a rate increase is not guaranteed. The Bank of England is expected to hold its rate at 3.75% on Thursday. This contrasts with the anticipated move by the US central bank.