With The Merge In The Rear View, What's Next?

📊 Macro Back In Vogue?

As we cautioned last week, the August 2022 CPI print on September 13th would likely prove to be a volatile event for asset markets in either direction. As it turned out, August CPI rose to 8.3%, coming in much worse than many people have been expecting. This resulted in a violent sell-off across asset markets, with crypto being no exception.

• Headline CPI surprised market expectations with an increase while many were expecting a decline. Core CPI numbers also doubled what many economic forecasters had been expecting.
• Another warning sign appeared in rental inflation and services, as both accelerated to posting their largest monthly increase to date.
• An area where many were expecting to see substantial declines in inflation was used vehicles. Again, defying market expectations, used vehicle inflation barely edged lower at all.
• In the past, we have mentioned that high inflation tends to be sticky. We are seeing that dynamic beginning to play out over the last several months.

Perhaps more important than the CPI print was the market’s repricing of the September FOMC Rate Hike expectations. One day prior to the August 2022 CPI print, the market was pricing in a 94% chance probability of a 75bps rate hike in September. In the moments after the CPI print, the market repriced these odds to a nearly 100% chance of a 75bps rate hike, while giving an 18% chance of an outsized 100bps rate hike, something the market has not yet done this rate hiking cycle.

If we combine this new market reality and expectation with the tone set at the Jackson Hole Speech a few weeks ago, it becomes increasingly clear that the next several months may be challenging for risk assets.

• “The reaction to the Jackson Hole comments was reminiscent of the reaction markets had in early June to the much hotte