San Francisco Frontiers - Markets drop again as US inflation fails to soothe rate fears

A highly anticipated report showed July consumer prices rose more than the previous month but less than feared, giving the US central bank room to take a lighter touch with monetary policy after more than a year of tightening.

The data also showed closely watched core inflation was easing, while jobless claims came in higher than expected, adding to optimism as the Fed uses the strength of the labour market as a guide in its decision-making.

However, while there is a broad expectation that policymakers will hold off on lifting borrowing costs at next month's meeting, analysts said there was still a chance they could do so later in the year.

Debate is also focused on how long rates will stay elevated, and some officials are keeping their options open as they try to bring inflation down.

San Francisco Fed boss Mary Daly told Yahoo! Finance that the latest reading "came in largely as expected, and that is good news".

But she added: "It is not a data point that says victory is ours. There's still more work to do. And the Fed is fully committed to resolutely bringing inflation back down to its two percent target."

And National Australia Bank's Tapas Strickland said: "The data should reinforce the widely held view that the Fed could skip a hike at the next meeting in September, but also keeps alive the possibility of a further possible hike later in the year given the tightness in the labour market."

Others pointed out that there were still big data points to come before the next policy decision, including on jobs and inflation.

SPI Asset Management's Stephen Innes said: "The case for another rate hike could still be made, especially on higher energy and food pass-throughs."

Wall Street provided a positive but largely tepid lead, having suffered a late retreat from the morning's CPI-fuelled rally, with observers suggesting a pullback was also expected after a healthy first half of 2023.

"This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though (San Francisco Fed boss) Daly isn't a voting member on the (policy board) this year," said Michael Hewson at CMC Markets.

Asia was negative once again.

Hong Kong extended the week's losses even as e-commerce titan Alibaba surged in response to an earnings report showing a forecast-busting rise in first-quarter revenue.

Shanghai, Sydney, Singapore, Seoul, Manila, Taipei, Mumbai and Jakarta also fell, though Bangkok and Wellington eked out gains. Tokyo was closed for a public holiday.

London dropped as traders brushed off data showing the UK economy saw small expansion in the second quarter. Paris and Frankfurt also fell.

Investors are keeping tabs on China, hoping leaders will provide some concrete measures to boost the torpid economy after more grim figures released this week on trade and inflation reinforced the view that the post-Covid recovery had run out of steam.

Reports said China's securities watchdog plans to hold a meeting on the property sector as they try to navigate a way out of a crisis that many warn poses a threat to the domestic and global economy.

- Key figures around 0810 GMT -

Hong Kong - Hang Seng Index: DOWN 0.9 percent at 19,075.19 (close)

Shanghai - Composite: DOWN 2.0 percent at 3,189.25 (close)

London - FTSE 100: DOWN 0.7 percent at 7,566.58

Tokyo - Nikkei 225: Closed for a holiday

Euro/dollar: UP at $1.0995 from $1.0983 on Thursday

Pound/dollar: UP at $1.2712 from $1.2676

Euro/pound: DOWN at 86.50 from 86.62 pence

Dollar/yen: DOWN at 144.57 yen from 144.77 yen

West Texas Intermediate: UP 0.3 percent at $83.03 per barrel

Brent North Sea crude: UP 0.2 percent at $86.60 per barrel

New York - Dow: UP 0.2 percent at 35,176.15 (close)

T.Martin--SFF