Market Update – 13th August 2020.

Yesterday’s US CPI inflation came in higher than expected, with the headline rate rising from 0.6% in June to 1.0% in July, while the core reading, which excludes volatile items such as food and energy, came in at 1.6%, up from 1.2% in June.

However, we do not believe that this is the start of a new inflationary wave which will cause the US Federal Reserve Bank (Fed) to start shifting to a hawkish stance (i.e. a tighter monetary policy environment), as inflation is still well below the Fed’s 2% target.

Additionally, and more importantly, inflation isn’t the Fed’s main focus right now – its focus is primarily on restoring US economic confidence and thus reducing unemployment (which currently stands at just over 10%).

Furthermore, ‘one strong reading does not a trend make’:  despite its best intentions the Fed has consistently undershot its 2% inflation target for years, and given the current excess spare capacity in the US economy it is unlikely to start reaching it now.

Later today we get the very important weekly US jobless claims data:  we are expecting both the initial and continuing claims to show a small decline as improving coronavirus data should have encouraged companies to rehire laid-off workers.

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