Capital Idea: Market wrap, 12 August

• Wall Street pulls back on US-Iran tensions and heading into US CPI data 

• Futures imply that odds of a September Fed hike is as good as a coin toss

Market sentiment is lukewarm amidst lingering geopolitical risk and as market participants head into US CPI data. Wall Street grinder lower in US trade, largely pushed around by some non-trivial – though comparatively modest compared to recent volatility – swings in the price of crude on headlines about the US-Iran war and the prospect of a peace deal. Comments coming from Pakistani officials that the two sides are nearing a partial peace arrangement washed out the impact of further heated rhetoric from both the US and Iranians, with crude prices unwinding early gains. Nevertheless, the lack of substantial news or progress in talks, with Iran doubling down on its commitment to govern the Strait of Hormuz, is keeping the risk for oil prices skewed to the upside and US indices on hold.

The US CPI data arrives at a juncture where the markets are literally – and appropriately given the FOMC’s recent ambiguous messaging – split on what the US Federal Reserve will do at its next meeting in September. The critical core inflation number is expected to have moderated to 2.5% in July, with headline inflation also tipped to ease. Right now, the markets are ascribing practically 50/50 odds of a hike by the Fed at its next meeting, with the CPI data a critical piece of the puzzle as to whether it raises rates or not. A hot core print, or one that reveals sticky price pressures stemming from the inputs that go into Fed’ preferred PCE Index gauge, could lift the probabilities of a hike again, and weigh on equities. Meanwhile, a soft number could lower them, especially after last week’s major miss in US jobs data.

(Source: CME Group)

Warm regards,

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