With the release of the US consumer price index (CPI) in August, the market has no longer any “dovish” illusions regarding the Federal Reserve (Fed). Market exchange contracts have fully priced in a 3-yard rate hike by the Fed in September and, more surprisingly, a 20% chance of a 4-yard rate hike (100 basis points) next week. At the same time, Nomura Securities directly raised its forecast, believing that the Fed will raise interest rates by 4 yards next week.
The latest data released by the U.S. Bureau of Labor Statistics on Tuesday (13th) showed that the annual growth rate of CPI in August was 8.3%, higher than the market expectation of 8.1%, and the pre-delivery value fell slightly from 8.5%; The core CPI rose 6.3% year-on-year, higher than the market expectation of 6.1% and the previous value of 5.9%. On a monthly basis, August CPI rose 0.1%, higher than the expected -0.1%, and the previous value was 0%, while the core CPI rose 0.6%, higher than market expectations and the previous value of 0.3%.
The data pointed to persistently high and widespread inflation, raising the possibility that the Fed will stick to aggressive tightening policy longer than expected.
Economists at Nomura forecast that the Fed might raise interest rates by a full percentage point next week, adding that inflation in core goods and services broadly strengthened in August, suggesting a series of risks of rising inflation might materialize, so they believe The Fed will respond more forcefully.
Economists at Nomura also expect the Fed to raise interest rates by another 2 yards (50 basis points) in November and December, with the rate hike in December being 25 basis points higher than the previous forecast. In addition, Nomura’s forecast for the final rate is 4.5%-4.75%, 50 basis points higher than previously, assuming the expectation of a 1-yard (25bps) rate hike in February 2023 remains unchanged.
Economists at Nomura also said it was a worrisome report for the Fed, not only locking in a 3-yard rate hike in September, but might also increase the risk of a 3-yard rate hike in November.
For meetings following September, the market is pricing in a 50% chance of a 3-yard rate hike in November and a 25% chance of a 2-yard rate hike in December. That means the market is pricing the Fed’s rate at more than 4% by the end of the year.
Investors now fully believe that the Fed will raise interest rates for the third time in a row at its meeting on September 20-21 next week. The tightening cycle will end in April next year, when interest rates will reach 4.28%.
The market expects that the Fed will start cutting interest rates following the rate hike has reached its peak. After the CPI report, traders believed that a more aggressive rate hike by the Fed this year would lead to a recession, and that it would have to cut rates more aggressively followingwards. Markets expect the federal funds rate to fall back below 3.8% by the end of next year.
Before the deadline, according to CME data, investors in the interest rate futures market had a 76% chance of the Fed raising interest rates by 3 yards next week, and a 24% chance of a 4 yards hike.
