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US CPI Rises above Consensus Estimates; Market Attention Shifts to Feds QE Bias

Asian equity markets drifted lower on weakness in the US banking sector as funding problems still exist and investors dont seem to be expecting a near-term solution. Slowly sentiment is being driven by macro data again, and US releases yesterday showed rising price pressures and declines in the labor market, which is clearly an ominous combination. The CPI report came in higher than expectations at 3.6% on a yearly basis (estimates were calling for a rise of 3.3%). The core figure (which eliminates the volatile energy component) rose 1.8% yearly, which was also higher than estimates. These figures will complicate things for the Federal Reserve since it makes quantitative easing stimulus more difficult to implement. A good percentage of the market was starting to expect another round of QE, so all the focus now shifts to the Fed Chairman (Bernanke) and his Jackson Hole speech later this month. The New York Fed President (Dudley) said that maintaining financial stability is the Feds primary directive, which is suggestive of the possibility that the Fed could choose to inject more stimulus even in an inflationary environment. The Philadelphia Fed manufacturing report for August was much lower at -30.7 (expectations were for a 2.0 reading), so the survey is now back where it was at the beginning of 2009. This suggests that the ISM report could also see some weakness, possibly even below the 50 level (expansionary level). Initial jobless claims rose to 408,000 (399,000 was the market estimate). Macro data will be limited today so sentiment will be headline-driven. The USD/JPY remains in its tight range of 76.4076.90 and the EUR/USD is looking weaker at 1.4290-1.4340. In Australia, the Prime Minister (Gillard) made reference to the current strength of the Aussie Dollar, saying that values are likely to remain elevated in the longer term but there have no significant discussions to enact intervention policies as a means for protecting exporters. For the most part, the high currency value has had no major effect on the countrys macro data but the main question going forward will be how long this can be sustained. In Japan, intervention rhetoric continues but no official activities have been noted. In macro data, the tertiary activity index rose +1.9%. This was lower than the 2.20% estimates and suggests that the economic recovery is continuing at a slower pace.

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