Market Talk: US inflation ‘journey is far from over’

A crude awakening for oil markets as prices drop, but will inflation be harder to shift? Brent crude has fallen below 90 bucks a barrel for the first time since August, after President Trump suggested further strikes in Iran may not be necessary. It's the latest leg of a dramatic retreat in oil prices this month, offering some welcome relief for consumers at the pump. But don't assume cheaper oil means inflation is beaten. All eyes are now on US CPI due later today, with price pressures expected to remain stubbornly high. Well, Jeff Hughes, the senior EMEA market strategist at BNY. So, Jeff, Trump's softer rhetoric has helped drive oil lower, but we still don't have a clear path to ending the conflict with Iran. Are markets getting ahead of themselves? Well, I think the market is getting ahead of the direction rather than the destination. The destination remains to be seen. That needs to be defined. But the direction of travel seems to be the consensus now towards de-escalation and the like. I don't think anyone assumes that the status quo antebellum is going to be the ultimate destination. And there have been shifts already, such as the composition of OPEC, for example. But any avoidance of spikes and I think what central bankers are looking for. Well, let's stick with inflation and CPI expected to cool in October today after two particularly uncomfortable months for consumers. But are we likely to see a meaningful slowdown? Well, right now, market expectations are for some slowdown in the headline figure for the U.S., but core inflation expected to come in at 0.2 and 0.3, similar levels. We've had some central bank policymaker warnings such that a Let's look at the FX impact, and the Democrats' victory delivered the negative dollar impact that markets had been anticipating. It has rebounded since, but are the ingredients there for a broader downturn? So two things there. Firstly, there's a difference between adding to U.S. exposures or dollar exposures versus… keeping assets in the U.S. and perhaps adding to some hedges in place. I think what we've observed is, especially against the euro, especially against the pound, some additional hedging has come through. But are people really exiting U.S. assets? Our data says otherwise. These are still very well performing. And the U.S. economy is performing well, as data has confirmed last week, too. So there's no reason to move away. Maybe some hedging on the edges from a very high level of exposures, I might add. That is certainly in play. But Otherwise, no, we don't believe so. Dollar exceptionalism, that remains very much the case in asset allocation. Well, Jeff, that's finished in Europe. And ECB's Lagarde said that the central bank should hike again at its next meeting in December if the data doesn't shift in the weeks ahead. So with European gas prices falling, will we see that shift? So, again, the direction of travel is welcome. What the ECB will be looking at is... How that will impact headline inflation next year, the recent forecasts continue to point to very, very high levels, which they're uncomfortable with. But if there are clear signs of second round effects. which they love to talk about, being well anchored, then at the very least, they probably won't talk about hiking beyond what some currently anticipated. So probably another move, and that's going to be the market base case, not pushing back against it for now. But this is certainly helpful for removing the further hikes that people have talked about. That was Jeff Hewitt from BNY. Don't forget, you can watch more videos on Reuters.com.