We expect core CPI inflation remained essentially unchanged at 0.22% m-o-m in August after 0.215% in July. Super core inflation likely accelerated moderately in August to 0.28% m-o-m from 0.19% in July. Core goods inflation appears to have moderated slightly as apparel prices and prescription drug prices declined in the month, which was partly offset by higher appliance and vehicle prices. Our forecast for CPI and PPI data points to 0.20% m-o-m core PCE inflation in August. Also along with the August reading, the BEA will introduce new methodologies for estimating three key components of the PCE price index: portfolio management and investment advice, legal services, and computer software and accessories. These adjustments will likely reduce y-o-y core PCE inflation by 0.2-0.3pp. If our forecasts are correct, we think that a majority of FOMC participants will see three months of benign core PCE inflation (0.1-0.2% m-o-m) from June through August as progress toward the Fed’s 2% inflation goal, leading to no rate hikes at the upcoming September FOMC meeting. Although Chair Warsh’s reaction function is unclear, recent Fed speak such as comments from New York Fed President Williams and Governor Waller suggest another 0.2% monthly core PCE inflation would be sufficient for the Fed to remain in wait-and-see mode. From a market perspective, we like to receive 2yr US SOFR around 4.30 levels with stop at 4.45 and TP at 4.05. CMP is 4.23. For the last few weeks, 1yr-1yr US SOFR remains our high conviction idea based on above view. We are currently received half risk at 4.15 and another half at 4.25 with stop at 4.4 and TP at 3.90. Last week it made a high of 4.35 before cooling down to current levels of 4.33. In FX, we remain bullish on JPY as we approach 16th Sep FOMC. In our opinion piece “JPY’s path ahead has changed post joint intervention” published on 8th Aug, we had given a target of 155 on JPY which was almost achieved last week. https://macro-spectrum.com/opinion/jpys-path-ahead-has-changed-post-joint-intervention We continue to see JPY ending CY26 around 152 levels.
