US Dollar (USD) recovered some of yesterday’s loss, S&P 500 futures are down after the underlying index hit a record high yesterday, and Treasury yields are up slightly. Markets are digesting ECB guidance and US CPI data, BBH FX analysts report.

Jobless claims hit highest since 2021

"The US economy is on the brink of stagflation. Progress towards the Fed’s 2% inflation goal is stalling. In line with consensus, headline CPI rose to 2.9% y/y in August vs. 2.7% in July and core CPI was unchanged at 3.1% y/y. Super core services (less housing), a good indicator of underlying inflation trends, printed at 3.2% y/y for a second consecutive month in August."

"In parallel, the US labor market is worsening. New applications for weekly jobless claims unexpectedly jumped to 263k for the week ended September 6 (consensus: 235k) vs. 236k the previous week, the highest since October 2021. We expect the Fed to prioritize maximum employment over price stability within its dual mandate given that monetary policy is moderately restrictive. Bottom line: a more dovish Fed policy stance can drag USD lower and underpin the rally in risk assets."

"The September University of Michigan preliminary consumer sentiment report is due today (3:00pm London, 10:00am New York). Headline is expected at 58.0 vs. 58.2 in August, well below the long run average at 84.4. More importantly, inflation expectations are likely to continue signaling that risks to the price outlook remain skewed to the upside. One-year inflation expectations are expected to print at 4.8% for a second consecutive month while inflation expectations 5 to 10 years out is seen at 3.4% vs. 3.5% in August."