MS: 50bp Hike In Sep More Likely Than 75bp

Following the softer than expected US CPI inflation, Morgan Stanley see a 50bp hike at the Sept FOMC as more likely than 75bp having seen the latter strongly supported by Friday's payrolls report, but a lot still depends on August CPI.

• Headline CPI inflation was -0.02% M/M in July (MSe +0.06%, consensus +0.2%), while core rose 0.31% M/M (MSe at +0.46%, consensus +0.5%).
• Headline should come down quite quickly over the next few months as declining energy and gasoline prices in particular should be a major drag. However, food prices continued to increase as falling agricultural commodity prices take longer to pass through to the consumer.
• Signs of a turnaround in headline inflation are helpful in preventing household inflation expectation becoming unanchored, but, even though the core slowed down a lot from the previous month, it’s still uncomfortably high and Fed officials are unlikely to see this as a signal to deviate from their steep tightening path we foresee through the end of this year.