Fed Rate Hike Decision Hinges on July CPI as Oil Surges 21%

The Federal Reserve's September interest rate decision hangs on inflation data released Wednesday, with markets pricing 11 basis points of tightening after July payrolls fell by 23,000. Five inflation reports will land before policymakers vote at the Sept. 15-16 FOMC meeting. July CPI arrives Aug. 12, followed by PPI on Aug. 13, PCE on Aug. 26, then PPI and CPI on Sept. 10-11. "The -20k payroll print was not the only concern," said James Knightley, chief international economist at ING. "More than 100k of downward revisions leave average payroll growth at just 20k over the past three months." The softer labor data pushed the 10-year Treasury yield to 4.60% before it settled at 4.64%, 4 basis points lower on the day. The S&P 500 closed 0.6% higher to extend its weekly advance past 3%. The Bloomberg Dollar Spot Index fell to its lowest level since the start of June. Oil prices climbed roughly 21 percent in July after Iran-related conflict disrupted supply, threatening to lift consumer inflation broadly just as the Fed weighs its next move. Long-term inflation swaps still imply 2.4 percent average inflation, and 30-year Treasury yields hover near 20-year highs, signaling bond investors remain skeptical the central bank has inflation contained. ING's forecast for Wednesday's July CPI release points to a dovish read: headline inflation at 0.1 percent month on month versus a 0.2 percent consensus, with core at 0.2 percent in line with expectations. A softer print would strengthen the case for a hold and increase the chances of EUR/USD breaking above 1.160 this week, with the next resistance at the 200-day moving average of 1.1630. The dollar has already absorbed much of the dovish repricing. Despite Friday's payrolls move, 11 basis points are still priced for September, 28 for