Indecisive Market Reaction to US CPI Beat
Breaking News: Indecisive Market Reaction to US CPI Beat
The US economy is heating up again after a series of disappointing economic reports, and markets are looking for further clues on how the Fed’s policymakers will respond. This week, the big data set includes the consumer price index (CPI), as well as speeches from Fed officials and earnings from major US companies such as Coca-Cola, Boeing, and Marriott.
Inflation is a key concern for the Fed, and the latest release could have a huge impact on the currency. The USD was already under pressure after Friday’s non-farm payrolls report, but a stronger-than-expected increase in inflation could prompt a big move in the greenback and drive down the 2-year Treasury yield.
Stocks have moved higher on Thursday as the US dollar has tumbled following a weaker-than-expected US jobs report, but traders will want to see if inflation has finally come under control before betting on any further rate hikes from the Federal Reserve later this year.
Traders will also be looking for any surprises in US housing data, with the latest construction spending expected to show that more building activity is on the way. While the housing sector has cooled, it is still a good indicator of the overall health of the economy.
Core inflation, which strips out volatile food and energy prices, is expected to fall slightly from the month’s y/y gain of 5.9%, but still remain at 5.9%, which would be the highest since August 1982.
The Fed has been raising rates since March in an effort to cool the economy and bring inflation down, but price increases have proven stubborn and a recent report suggested that the central bank may be forced to tighten its monetary policy further.
As it stands, the Fed is hedging its bets by hiking interest rates by 0.75 percentage points in June and by preparing for a big move at its meeting in late July. The Fed will need to decide whether it wants to go for more aggressive moves or take the middle ground.
Inflation is sticky and is likely to continue rising, despite the Fed’s efforts to normalise monetary policy, according to Thomas Poullaouec of T Rowe Price Multi Asset Solutions. The US dollar fell as much as 1.5% after the report and sank to a low of 78.80 against the yuan afterward, while stocks rose.
Meanwhile, the two-year US government bond yield dropped below 3% after the report, with investors now expecting the Fed to raise rates again at its June meeting. The move was the biggest in more than a decade, but many traders believe it is unlikely the Fed will go for it again until unemployment drops further and sluggish inflation picks up steam.
Ultimately, the best outcome for the Fed will be to continue to normalise monetary policy and bring inflation down while maintaining the outlook for strong job growth. However, this will be difficult if the economy is cooling down. Consequently, a stronger-than-expected increase in headline CPI or even a rise to above the symbolic 5% mark could spark some panic amongst investors.