Dollar firmer following US inflation data
Stronger than expected US CPI inflation data triggered a notable reassessment of Fed rate hike expectations, with the market now more than full pricing in a 25bps increase in the central bank’s policy rate at next month’s meeting (Dec 8-9th). This in turn triggered a sharp spike in US bond yields, particularly at the short-end of the curve, and an accompanying strengthening of the dollar. The US currency is currently trading at around $1.1150 and $1.3325 versus the euro and sterling respectively, up around a cent or so from yesterday morning’s levels. EURGBP is a touch firmer this morning, trading at around £0.8365.
Following yesterday’s inflation data, the market is more than fully pricing in a 25bps increase in the Fed’s policy rate at next month’s meeting and about 75bps in total by September next year, the latter almost 25bps more than was priced in prior to the data. This repricing of rate hike expectations in turn prompted a sharp rise in US bond yields, with 2- and 10-year yields ending around 18bps and 10bps higher on the day respectively. There was some spillover to other bond markets as well, with German yields increasing by 5-10bps and UK yields rising by 10-13bps. Higher yields weighed on US equity markets, which ended down on the day albeit off their lows. Asian markets have performed fairly well overnight though, with the main indices in the black, while European stocks have opened in positive territory this morning.
Headline consumer prices in the US rose by 0.4% in October according to yesterday’s CPI report, ahead of the consensus forecast for an increase of 0.3%. October’s outturn was driven by rising energy, food, and core prices (which excludes energy and food prices). The latter rose by 0.3% for a third month in row (which if sustained over the course of 12 months would equate to an annual inflation rate of over 3.5%), with both core goods and core services prices increasing on the month.
Comments by Fed member Waller ahead of the inflation data triggered an initial rise in US bond yields, when he said a “50bps hike in the policy rate should be considered at the December meeting” if inflation in October came in higher than expected. His Fed colleague, Logan, in remarks yesterday as well, said “at least” two more 25bps hikes are needed to return inflation sustainably to target. She also noted that “it may be possible to move more rapidly this winter than the (Fed) has moved so far this fall”, suggesting she favours two quick-fire quarter-point rate increases in December and January.
It is an extremely quiet day ahead in terms of economic data with little or nothing of note scheduled for release, while the US bond market is closed for Veterans Day. There are a few ECB members due on the wires over the course of the day.