12.08.2026 - The Inflation Party
US inflation came in exactly as expected — and markets are celebrating.
The Consumer Price Index rose 0.1% in July, bringing the annual inflation rate to 3.4%.
Excluding food and energy, core CPI increased 0.2% month-on-month and 2.5% year-on-year. All readings were in line with Wall Street expectations.
Despite inflation moving away from the Federal Reserve's 2% target, traders reduced the probability of a Fed rate hike in September, providing another boost to risk assets.
Markets:
Equities: US markets move higher, while Europe lags behind
Bonds: yields move lower - US 10y yield above 4.67%, Japan 10y yield 2.85%
Commodities: Oil prices slightly lower, WTI around USD 82/barrel and Brent around USD 88/barrel
Precious metals prices continue their rally, gold above USD 4’430/oz, silver trades above USD 66/oz
Currencies: US dollar obviously lower, Japanese Yen weakens, USDJPY 159
Cryptos: do not join the euphoria - Bitcoin back towards USD 63k
Volatility: The VIX index falls below 15 (good opportunity for hedging)
My View: Investors are celebrating an inflation number that was higher, but exactly as expected. Even more remarkably, traders are reducing bets that the Fed will hike rates in September.
Remember: 3.4% inflation versus the Fed's 2% target.
In my view, investors have become too optimistic about the Fed and too euphoric about markets. The Fed remains behind the curve.
Clearly, the positive momentum trade is back. Falling yields, a weaker US dollar and declining volatility are providing another supportive backdrop for risk assets.
But sentiment can change very quickly. Headlines continue to be dominated by risks that, in my view, markets are largely choosing to ignore.
An oil-price spike remains a realistic scenario. Iran has sent a clear message that it is unwilling to make further concessions to President Trump and continues to insist on its key negotiating demands, including the unfreezing of around USD 300 billion in assets.
At the same time, the inflation story goes beyond oil. Commodity prices are moving higher across the board, including industrial metals and agricultural commodities. This is feeding into input costs across a broad range of products and could create renewed inflationary pressure further down the road.
Tomorrow brings the next important inflation test, with US Producer Price Index data due in the afternoon.
Markets currently appear to be pricing an almost perfect combination: persistent economic growth, no further acceleration in inflation and a more dovish Fed.
I remain skeptical that this rally is sustainable.
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