1. Macro Landscape — Shifting Policy Odds and Market Sentiment
The trading week from 11 to 15 August was marked by alternating waves of inflation-driven repricing, fluid Federal Reserve messaging, and complex geopolitical negotiations. The week opened with the dollar supported by safe-haven demand ahead of the CPI release. Midweek CPI data showed headline inflation largely in line with estimates, but core inflation held firm at 3.1% YoY, subtly altering the rate-cut narrative. Sentiment turned sharply again on Friday when the PPI posted its largest monthly jump in three years, forcing markets to reassess aggressive easing expectations.
2. Inflation Data and Policy Tone
- CPI (13 Aug): Headline CPI rose 0.2% MoM and 2.7% YoY, matching forecasts. Core CPI’s 3.1% YoY print was a modest upside surprise, reinforcing concerns about embedded price pressures.
- PPI (15 Aug): The July Producer Price Index surged 0.9% MoM and 3.3% YoY, well above expectations, alongside jobless claims holding steady at 224k.
- Fed Commentary: Treasury Secretary Scott Bessent retreated from his earlier call for a 50 bp cut, now favoring 25 bp with flexibility based on future data. St. Louis Fed’s Musalem stressed that tariffs are still influencing inflation, making large immediate cuts unjustified.
3. Political & Geopolitical Drivers
- Fed Leadership Speculation: Reports suggested potential successors to Chair Powell include Bowman, Jefferson, and Logan.
- Ukraine Diplomacy: Trump cast the Alaska meeting with Putin as a starting point for negotiations, while reports hinted at U.S.–Russia discussions on a ceasefire that could legitimize Russian territorial gains.
- Trade Relations: A 90-day extension of the U.S.–China tariff reprieve eased immediate concerns. India maintained talks with Washington despite steep tariff hikes; Brazil canceled its planned U.S. visit amid escalating disputes.
- Middle East: Israel reiterated its goal to dismantle Hamas in Gaza, not to occupy territory, in response to Germany halting arms exports.
4. Currency Performance — Event-Driven Swings
- Dollar Index (DXY): Strengthened early on haven demand, weakened after CPI, then rallied post-PPI to test its 21-DMA.
- EUR/USD:
- Early week slide below its 21-DMA to 1.1590.
- CPI rebound to 1.1698, shy of July highs.
- Ended near 1.1645 after PPI-driven dollar strength.
- GBP/USD: Rose to 1.3523 midweek, retraced to 1.3524 after Friday’s PPI.
- USD/JPY: Ranged between 147–148; retreated with yields post-CPI, then bounced on PPI data with a bullish hammer setup.
5. Commodities & Risk Assets
- Gold: Maintained bullish structure above $3,340, potential toward $3,370; eased slightly on stronger dollar after PPI.
- Copper: Jumped 1.7% post-CPI on weaker USD and optimism over tariff détente.
- Oil: Rose 2.2% late week as Russia risk premium increased.
- Equities:
- S&P 500 hit record highs midweek, led by tech and AI-driven gains.
- Gains moderated Friday as rate-cut expectations cooled.
6. Rates & Yield Curve Action
- Post-CPI: Curve steepened to +56.0 bps, the widest since May.
- Post-PPI: Yields rose ~5 bps, curve narrowed slightly to +55.2 bps.
- Credit spreads stayed tight; midweek optimism supported risk appetite despite geopolitical risks.
7. Looking Ahead
Key triggers include U.S. retail sales and Michigan sentiment, Japan GDP, and Eurozone employment. Geopolitical risk around Ukraine talks and any shifts in Fed rhetoric will remain potential volatility catalysts.
8. Trading View
- FX: Fade EUR/USD near 1.17; look to re-engage on dips toward 1.1590 if U.S. data beats.
- Rates: Maintain steepeners but hedge with short-dated payers ahead of inflation prints.
- Commodities: Gold buy-on-dip bias above $3,330; oil stays headline-sensitive.
- Equities: Maintain tech overweight; introduce protective hedges if yields firm further.
