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MARKETS

On another roller-coaster day for investors, U.S. stocks quickly shook off a higher-than-expected CPI-induced swoon as Big Tech came to the rescue with a classic "buy-the-dip" rebound. It begs the question: Isn’t September supposed to be a bad month for stocks? If you're banking on Wall Street being that predictable, you're probably giving it too much credit.

Sure, the larger-than-expected bump in Core CPI won’t make it easy to justify a 50bps rate cut next week. But with the Fed laser-focused on the weakening labor market, they’re unlikely to be too rattled by a spike in shelter prices. This won’t derail their plan to start cutting rates, and they might even go more aggressively if the data warrants it. Still, the debate lingers: will we see a soft landing or a hard one?

Rates traders, eyeing cross-asset correlations and the swooning commodity markets, are hedging against the worst-case economic scenario—250+ basis points of cuts this cycle. Stock investors, however, would prefer a slow grind lower to that end point, signaling that growth is holding up and the Fed isn’t behind the curve. If the economy continues to slow (but not nosedive into a recession), the Fed can stick to a measured pace of 25bps cuts, which could be the sweet spot for both markets and stock multiples.

The challenge is that we’re still grappling with perpetually shifting goalposts, as the volatility in 2-year U.S. Treasury yields suggests economists are struggling to fine-tune their forecasts. An overly data-dependent Fed only adds to the uncertainty, stirring more ripples in an already unsettled market.

At the end of the day, though, while this CPI report wasn’t what the market wanted, it’s not enough to derail the Fed’s rate-cutting plans next week. Stock investors know that the Fed put is alive and well and that could keep them happy for now.

The good news? Today’s CPI report showed progress toward the Fed’s inflation goals, with energy prices continuing to fall and room for services and housing inflation to ease. Nothing here screams “stop the rate cut music.”

In fact, with this CPI report in the bag, infaltion expectations, thanks the the drop in oil prices, well in line with mandate the Fed might want to cut 50bps while they still have the upper hand. The next run of weaker data could paint a picture of a Fed playing catch-up, which isn’t great for stocks. So, why not give the doves what they want? Let the dollar slide a bit, give the global economy room to breathe, and get ahead of the curve while there’s still time.

That said, you're probably better off gauging the Fed’s current stance with this key takeaway:"A larger-than-expected jump in cyclically-sensitive shelter prices is raising doubts among Fed officials about starting rate cuts with a 50bps reduction next week," according to Wall Street Journal’s "Fed whisperer" Nick Timiraos. His comments, following the latest inflation data, suggest that the door is now firmly closed on the prospect of a half-point cut at the upcoming September FOMC meeting.

The true test will come after the first rate cut, when the real shuffle and shake in the markets begin. The Fed's dot plot and market rate cut pricing will face mounting pressure to align from what’s quickly becoming an unsustainable position. The looming concern is that if the Fed doesn’t catch up to the evolving economic reality, and if the data keeps casting a more sobering picture, the risk of falling behind the curve could derail the entire soft-landing narrative. The stakes couldn't be higher.

OIL MARKETS

This year's scorching heat along the U.S. East Coast, hence the Atlantic is hotter than normal, has kicked up hurricane season, and that typically sends ripples through the oil markets. The first blow usually lands on oil production, as companies scramble to evacuate offshore platforms in the Gulf of Mexico. That’s when the mechanical oil bid starts heating up, with prices rising in tandem with the storm’s intensity. The twist? These price spikes rarely have much-staying power.

What’s fascinating, though, is how OPEC seems utterly defenseless in the face of a perfect storm of global economic woes. China is caught in a deflationary spiral, the U.S. is staring down a labour market cooldown, and Germany is plodding through a recession that feels like it’s in slow motion. And with the market still well-supplied, any potential upside for oil feels muted. This hurricane season might end up being little more than a blip in an already chaotic oil market—a short-lived flare for traders eyeing a prime moment to short Brent.

FOREX MARKETS

This week USDJPY remains firmly anchored to the broader risk-on, risk-off (RORO) dynamics, as its performance is tied more to safe-haven flows.

The yen has emerged as one of the top-performing G10 currencies, buoyed by narrowing U.S.-Japan rate differentials and potential room for hawkish repricing along the Japanese yield curve.

While the long-standing correlation with U.S. 10-year yields remains intact, the yen is now also moving in sync with fluctuations in oil prices and the S&P 500, and over the short term transforming it more into a momentum trade than a pure trend play, as we hinted earlier this week. That said, the gradual path lower for USDJPY still seems to make sense, driven by these multifaceted factors

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