U.S. bond yields fell as inflation data raised expectations of a Fed rate cut, boosting equities, especially the "Magnificent 7." Gold hit record highs, oil prices rose, and bitcoin gained 5%.

U.S. bond yields declined across the board this week, with the short end of the curve experiencing a sharper drop, contributing to further yield curve normalization. The 10-year Treasury yield fell to 3.657%, while the 2-year yield declined to 3.595%. This movement follows good inflation data, which has heightened market expectations for a potential rate cut by the Fed.

Equity markets posted robust gains, with both large-cap and small-cap stocks rising more than 4% for the week. The "Magnificent 7" stock group outperformed, climbing over 7%. This momentum likely reflects growing investor optimism fuelled by the heightened probability of a Fed rate cut.

The U.S. dollar remained stable against the euro, with the exchange rate reaching 0.90277. WTI crude oil prices rose, supported by expectations of rate cuts and potential supply disruptions from Hurricane Francine’s impact on the Gulf of Mexico. Gold prices reached record highs, driven by factors including rising government spending, a widening U.S. deficit, geopolitical tensions, political uncertainties, and continued gold accumulation by central banks. In the cryptocurrency market, bitcoin gained just over 5%.

Inflation slowed to 2.5% YoY, consumer sentiment improved, and oil inventories rose, with expected Federal Reserve rate cuts.

In August, inflation slowed, with the headline Consumer Price Index (CPI) falling to 2.5% YoY, the lowest since February 2021, while core CPI rose by 0.3% MoM. This has led to expectations of a 25 basis point (bp) rate cut by the Fed. Goods deflation stabilized, but inflation in services, especially housing, continued to rise. Housing prices increased by 0.43% MoM, and rental inflation also remained high. Consumer sentiment improved, reaching its highest level since May 2024, driven by better buying conditions and inflation expectations lowering to 2.7% YoY. However, long-term inflation expectations remain slightly elevated. Meanwhile, oil inventories grew by 0.8 million barrels, though refinery inputs and gasoline production fell, with rising crude oil imports contributing to higher petroleum inventories. Oil prices are expected to remain stable for the rest of the year, and a moderate improvement in consumer confidence is anticipated, driven by potential interest rate reductions from the Fed.

In August, CPI fell to 2.5% YoY, its lowest since February 2021. Core CPI rose 0.3% MoM. The Fed is expected to cut rates by 25 bp next week.

The headline CPI moderated to 2.5% YoY, down from 2.9% in July, marking the lowest level since February 2021. This deceleration in headline CPI is largely attributed to continued deflation in goods and the base effect of energy prices, which have begun to impact the index for the first time since early 2024. The Core CPI remained steady at 3.2% YoY as anticipated, but experienced a monthly increase of 0.3%, surpassing the forecasted 0.2%. Market expectations now indicate a likely 25 bp rate cut in September.

Goods deflation appears to be stabilizing, while recent data indicate renewed price pressures across both industrial and service sectors. Services inflation remains a key driver, with the sector experiencing its highest monthly increase since April, reaching a 4.93% YoY rate. Within services, house price inflation—its largest component—increased by 0.43% MoM and 5.23% YoY, up from 5.05% in July. Rental inflation rose by 0.39% MoM and 4.97% YoY, slightly below July’s 5.09%.

In this context, the Fed is anticipated to implement a 25 bp rate cut. While overall inflation is on track, ongoing pressures in services—particularly in housing and transportation—persist. With a weakening labour market yet low unemployment, the Fed is likely to act cautiously, avoiding a more substantial 50 bp cut that could provoke adverse market reactions.

In line with market expectations, we anticipate a 25 bp rate cut on September 18. A more substantial 50 bp reduction is unlikely given persistent inflationary pressures in the services sector and a labour market with low unemployment.

Consumer sentiment improved, and inflation expectations declined, but long-term views remain high. Election uncertainty persists, with increasing predictions of a Harris win, contributing to widening partisan sentiment gaps.

Consumer sentiment reached its highest level since May 2024, marking a second consecutive monthly increase and a 2% rise over August, largely driven by improved buying conditions for durables due to more favourable pricing perceptions. Expectations for personal finances and the broader economy also saw improvement, despite slightly softer labour market views. Sentiment now stands 40% higher than its June 2022 low, though election-related uncertainty continues to temper consumer optimism. A growing number of Republicans and Democrats predict a Harris victory, leading to a slight increase in partisan sentiment gaps. Year-ahead inflation expectations declined for the fourth month in a row to 2.7%, the lowest since December 2020 and within the pre-pandemic 2.3-3.0% range. Long-term inflation expectations rose slightly from 3.0% to 3.1%, remaining modestly elevated compared to pre-pandemic levels.

We anticipate a moderate improvement in consumer confidence during the second half of the year, driven by expected interest rate reductions from the Fed.

The EIA reported a 0.8-million-barrel increase in US crude inventories, with lower refinery inputs, reduced gasoline production, and rising crude oil imports.

The Energy Information Administration (EIA) disclosed that commercial crude oil inventories in the United States, excluding those in the Strategic Petroleum Reserve, increased by 0.8 million barrels to 419.1 million barrels for the week ending September 6, falling short of the projected 0.9-million-barrel rise. During the same period, US crude oil refinery inputs averaged 16.8 million barrels per day, 141K barrels per day lower than the previous week's average, with refineries operating at 92.8% of their capacity. Gasoline production decreased to an average of 9.4 million barrels per day, while crude oil imports rose to 6.9 million barrels per day, an increase of 1.1 million barrels per day. Total commercial petroleum inventories also saw a rise of 9.0 million barrels.

We project that oil prices will maintain their current levels for the remainder of the year.