Market volatility has eased in the lead up to today’s highly anticipated US CPI data. The VIX index has moderated closer to 20, which is notably below the mid-30s peaks it has witnessed on multiple episodes so far this year. The JPMorgan Global FX Volatility Index has also cooled below its 100-day moving average.
Still, this relative calm could be upended by today’s US July inflation print, where the median estimate for economists’ forecasts comes in at 8.7%. Although that would mark an easing from June’s 9.1%, it would still be more than four times higher than the Fed’s 2% target.
Markets are well aware that multi-decade high inflation remains the Fed’s number one enemy, to the point that policymakers are willing to crimp economic growth in the name of vanquishing scorching-hot inflation.
The headline CPI figure has shown a tendency to surprise to the upside, having done so in five of the past six releases. Yet another hotter-than-expected CPI print today could prompt risk assets to unwind more of their recent gains.
However, signs that US inflation has peaked may further embolden risk-taking activities in markets, on the notion that the Fed can start to walk back from more jumbo-sized rate hikes.