Tuesday: US Building Permits/Housing Starts.

Wednesday: RBNZ Policy Announcement, US Retail Sales, FOMC Minutes.

Thursday: Fed’s George and Kashkari.

Following the strong labour market report, the US CPI last week missed expectations across the board. The biggest contributor to the decline was energy prices. The supply side of energy didn’t change much, so it’s the demand side that is weighing on prices. This just means that the Fed (which can adjust only the demand side) needs to keep on tightening and depress demand if it wants to achieve its goal. Naturally, this leads to a worse growth outlook, which is as of now the only way to fix the current inflation problem. In fact, although the energy part fell, the other stickier components like services increased or remained high.

The reaction to the CPI report was a rally in risk assets as a less aggressive Fed coupled with unchanged or lower inflation expectations depresses real yields, and that ultimately leads to higher propensity towards risk assets. We saw the US Dollar being offered across the board, the stock market rallying, US yields falling, commodities rising and cryptocurrencies following the risk party. This is not something the Fed wants to see after just one good CPI report. If financial conditions ease too much, the Fed may even be forced to surprise with out of consensus hikes just to reimpose its will and determination. For now, the market prices a higher probability of a 50 bps hike at the September meeting.