Why Wednesday's inflation print could provide the next dovish catalyst

Investing.com -- HSBC said Wednesday's U.S. inflation report could serve as the next catalyst to push Federal Reserve rate hikes out of market pricing, reinforcing its view that the "US exceptionalism" narrative is fading.

Multi-Asset Strategist Duncan Toms said hawkish Fed rate pricing "is facing a reality check from the data," and that last week's labor market report provides further evidence "we may have already seen peak US Treasury hawkishness."

Since July 23, the firm noted, U.S. rate pricing has pared some of its rate-hike expectations.

To track the shifts, HSBC launched two new dashboards, one for the U.S. labor market and one for U.S. inflation, aggregating a "Labour health" series and an "Inflation heat" series.

Toms stated that labor health is key to whether markets move in risk-on or risk-off fashion, while more extreme moves in inflation heat are closely tied to a "Goldilocks or reverse Goldilocks backdrop."

On inflation, HSBC noted June delivered "an unexpectedly dovish print, which was broader than just a weaker oil story alone," and that its nowcasts point to another benign reading on Wednesday.

Such a print, the bank said, "could then be the next dovish catalyst for Fed rate hikes coming out of the price." HSBC expects the U.S. Treasury curve would then likely bull-steepen as hikes are priced out further.

That, according to Toms, should make for "a potent Goldilocks backdrop with broad-based gains across virtually all asset classes," as the firm continues to fade the US exceptionalism trade.

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