The headline inflation rate came in lower, as expected, dropping to 2.5%, its lowest level since February 2021, while core inflation (excluding food and energy) stood at 3.2% and remained far from the 2% target. Previous bets of a larger cut recede, with majority market participants looking at 25 bps cut. The Fed is projected to continue cutting rates for at least 18 months to two years. Diving deep, the report showed year-over-year energy inflation at -4.0%, food inflation at 2.1%, services inflation at 4.9%, and shelter inflation at 5.2%. Federal Reserve officials, including presidents from Chicago and Atlanta, have indicated support for rate cuts, pointing out major inflation slowdowns and fears of possible labour market disruptions.
EQUITY
Major stock indexes closed higher on Wednesday, especially Nasdaq, after large-cap technology stocks traded higher. Nvidia gained 8% after CEO Jensen Huang reported strong demand for the company's AI chips, pushing the semiconductor industry higher with the VanEck Semiconductor ETF jumping 5.2%. Asian stocks were broadly higher, tracking the tech industry, with the Nikkei rising almost 3% even with hawkish comments from a senior Bank of Japan official.
GOLD
Gold prices were initially pressured after the inflation report but have since recovered to above $2510 per ounce. Investors are increasingly valuing gold as a hedge against immediate event risks and a beneficiary of lower interest rates, influenced by US elections, geopolitical uncertainties, and BoJ's rate trajectory. Analysts predict that gold prices will remain well supported in the future, with Capital Economics forecasting a price of $2,750/oz by the end of 2025, citing US dollar weakness and continued central bank buying.
OIL
Crude benchmarks were choppy, with prices mainly driven by concerns over Hurricane Francine's impact. There is already a shutdown of offshore platforms in the Gulf of Mexico, accounting for 15% of U.S. oil production. Slowing global crude demand remained, as shown by rising U.S. oil stockpiles and reduced gasoline demand, as well as OPEC's downward revision of its forecast for global oil demand growth in 2024 and 2025. Market attention now turns to the International Energy Agency's upcoming monthly report for further insights.
CURRENCY
The greenback presented mixed performance after August inflation data reinforced expectations of a smaller 25-basis-point Fed rate cut next week. The political landscape had also impacted currency, with debate boosting VP Kamala Harris's chances. Meanwhile, China's yuan held steady against the dollar as markets awaited domestic economic data, with sentiment remaining bearish due to the lack of significant improvement in China's growth despite stimulus measures.
