Today’s CPI report confirms that the 50bps cut markets were hoping for is now completely off the table, with markets currently pricing in only a 10% probability of such a scenario, compared to 50-60% just last week after the NFP report.

We knew the energy component would deflate significantly this month, with retail gasoline prices down 20-25% during August. The overall report is actually not that hawkish beneath the surface—food prices are stable, used cars and trucks didn’t increase as much as feared, and the commodities part of the core component continues to deflate, despite transportation services and shelter lifting the overall print. The main takeaway, however, is that the report wasn’t dovish enough to confirm a 50bps cut (given that actual market consensus was closer to 0.1% than 0.2%), but also not too hawkish to trigger a market selloff. It’s the perfect cocktail for equity and USD bulls, while rates are being repriced slightly.

Ironically, if we had gotten a soft enough print to confirm a 50bps cut in September, it likely wouldn’t have been good news for markets either way. Markets like inflation coming down slow and steady – not in an instant.

Chart 1: US CPI decomposed