CPI in the Goldilocks Zone: Softer Dollar, Steeper Curve, and a Risk-On Tilt
CPI in the Goldilocks Zone: Softer Dollar, Steeper Curve, and a Risk-On Tilt
Executive Snapshot
July’s U.S. CPI landed almost exactly where markets hoped: headline up 0.2% m/m and 2.7% y/y, core up 0.3% m/m and 3.1% y/y. That mix—firm but not frightening—unlocked a risk-on session: the S&P 500 notched another record, the dollar index (DXY) slid to fresh August lows, and the 2s–10s Treasury curve steepened to its widest since May (~+56–57 bps). Odds of a September Fed cut coalesced around the ~90–94% range, while traders penciled in at least one more reduction by year-end. The move synced with a broader global risk rally: the MSCI ACWI hit an all-time high, Nikkei vaulted above 43,000, and capital continued rotating into ex-U.S. equities amid a weaker dollar.
CPI Decomposition and Policy Path
The print threads a narrow needle. Headline inflation’s deceleration (helped by softer energy and flat food) balanced against a stickier core pace. Under the hood, core services remains the nagging piece—still running hot near the mid-3% annualized zone—yet not hot enough to overturn the growing case for a policy pivot. Real wages perked up (real weekly earnings +0.4% m/m), tempering the growth-scare narrative. Put simply: the data neither reignites inflation fears nor undermines growth outright—ideal for risk assets, at least for now.
Policy read-through: With CPI not derailing disinflation hopes, the Fed can justify an initial insurance cut in September if incoming PPI, jobless claims, and retail sales don’t surprise hawkishly. Fed commentary is mixed—some officials caution against cuts given tariffs’ uncertain pass-through, others emphasize slackening consumer momentum—but the market’s reaction function is clear: “not-too-hot” CPI sustains the easing bias.
U.S. Rates: Anatomy of the Steepener
Yields mixed with a steeper curve: front-end anchored by policy-cut pricing; long-end drifting with improved growth sentiment and safer inflation term-premium. A curve migrating toward less inversion is consistent with “soft-landing” positioning. Traders will watch whether the steepening is bull (yields down) or bear (yields up). Tuesday leaned toward bear-steepening: equities rose, cyclicals breathed, and copper rallied—signals of “reflation without fear.”
FX: Dollar Softens; Cross-Currents in Majors
EUR/USD: Jumped above the 21-DMA and into the daily cloud top, stalling just under the 1.1698 August high. Momentum is constructive—daily and monthly RSIs rising—with firm support near the 55-DMA (~1.1592). Euro tailwind: tighter U.S.–German 2-year spreads and a global risk bid.
USD/JPY: Slipped below 148 as the curve steepened and DXY fell, though yen crosses held up on low vol and strong equities. A doji near the 21-DMA (~147.97) keeps bulls engaged; 147.36–147.30 is the nearby support zone. A break back through 148.60–148.80 would re-ignite topside momentum.
GBP/USD: Pushed to 1.3523 (new August high) before settling just under the 55-DMA (~1.3501). UK payroll softness and falling vacancies signal labor cooling, but wage growth keeps the BoE cautious about cutting too quickly. 1.3541 (61.8% of the July 1–Aug 1 decline) is the resistance pivot; 1.3400/1.3372 (100-DMA) supports.
AUD/USD: Recovered from early weakness to 0.6541, reclaiming the cloud and 21/55-DMAs. A bullish engulfing on the daily candle and rising RSIs add a constructive technical layer. China-sensitive crosses also benefited as USD/CNH slipped and commodities firmed.
Bottom line: With the dollar on the back foot, G10 pro-risk FX (EUR, GBP, AUD) can grind higher so long as U.S. data doesn’t re-accelerate inflation or crater growth.
Equities: Broadening Risk Appetite
U.S. equities rallied (S&P 500 +1.0%), led by tech and communication services. Globally, breadth improved: Asia and Europe participated, and ex-U.S. flows accelerated ($13.6bn in July, the largest since 2021). The narrative: disinflation + easier policy abroad + a weaker dollar = multiple support outside the U.S. While episodic political headlines (e.g., debates around central-bank independence or data-publication norms) can inject volatility, the dominant impulse is still liquidity and earnings resilience.
Commodities and Crypto: Mixed but Stable
Oil hovered as traders awaited U.S. inventory confirmation and eyed the U.S.–Russia Alaska summit’s implications for sanctions and supply. Strategists flagged “wait-and-see”; base case remains range-bound until clarity.
Gold edged higher toward $3,350–3,400, riding the softer dollar and higher Fed-cut odds. Non-yielding assets benefit as front-end rates peak.
Copper popped ~1.7%, consistent with a gentle global growth tone and dollar softness.
Ether pushed toward a near four-year high, aligning with broader risk appetite.
Global Indices: Ex-U.S. Outperformance Theme
Year-to-date, MSCI Europe and MSCI Asia ex-Japan have outpaced the S&P 500, aided by cheaper forward P/Es (~14–15 vs. ~22–23 in the U.S.) and a weaker dollar that lifts USD-based returns. With central banks in Australia already cutting and New Zealand expected to follow, investors see easier policy outside the U.S. as a tailwind for non-U.S. risk.
Risk/Return Landscape Right Now
Carry and credit: benign. Spreads contained, default fears muted, but watch late-cycle leverage.
Equity vol: grinding lower (VIX at fresh cycle lows), reinforcing carry, buy-the-dip, and options-selling behaviors—until a macro surprise arrives.
FX risk: asymmetry grows against the dollar if disinflation persists; watch sticky services inflation and tariff pass-through as spoilers.
Investor Sentiment and Positioning
Positioning is rotating toward global diversification and cyclically sensitive assets. Sentiment reflects soft-landing confidence, but not euphoria: investors still respect left-tail risks (policy shocks, geopolitics, data integrity concerns). This “skeptical risk-on” stance leaves room for further participation if data cooperate.
What to Watch Next
U.S. PPI, claims, retail sales (near-term validation of the CPI story).
Germany final CPI and UK RICS (European micro-checks).
Japan CGPI and Reuters Tankan (BoJ trajectory—rate-hike hopes keep slipping).
EIA inventories (oil balance; post-API confirmation).
Geopolitics: Alaska summit—expectations downplayed; sanctions path matters for energy and broader risk appetite.
Strategy Map and “What If?” Scenarios
Base case (soft landing): Maintain pro-risk tilt: quality growth, cyclicals leveraged to a weaker dollar, and selective EM/ex-U.S. equities. In rates, prefer steepener expressions; in FX, fade broad USD strength.
Upside risk (growth re-accelerates, inflation tame): Beta and copper-sensitive assets outperform; duration sells off modestly; oil range breaks higher only if supply constraints follow.
Downside risk (core re-heats or growth buckles): Dollar bounce; defensive equities and gold gain; front-end cuts re-priced slower (if inflation shock) or faster (if growth shock).
Final take: July CPI keeps the Goldilocks narrative intact. Until data or policy pushes it off track, a softer dollar, a friendlier curve, and healthier breadth underpin the global risk trade.
