US inflation data prompt big reaction

Yesterday’s stronger than expected CPI inflation report in the US – the third in a row – prompted a sizeable reaction in markets. The timing of a first Fed rate cut was pushed out further to the back end of this year, US bond yields soared, US equities sold off, and the dollar strengthened. The latter has gained more than a cent vis-a-vis the euro and sterling, to around $1.0730 and $1.2530 respectively (EURUSD is not far off its 2024 to date low of just under $1.07) and has risen to a 34-year old high against the yen north of Y153. Amidst all of this, the euro-sterling cross is little changed trading at around 85.6p.

The market now expects just about 35bps worth of rate cuts from the Fed this year, down from around 60bps before the inflation data, with a first 25bps reduction priced for November. This has contributed to a sharp rise in US bond yields with 2- and 10-year yields increasing by 25bps and 20bps respectively, the latter to over 4.5% (with German and UK yields following some of the way higher). US stocks fell as well – the S&P 500 shed around 1% – albeit closing off the lows of the day.

Regarding the US inflation data, both headline and core consumer prices rose by 0.4% month-on-month in March, ahead of the 0.3% increase expected for both and the 0.3% increase for both recorded in February. This saw the annual headline inflation rate rise for a second consecutive month to 3.5%, while the core inflation remained at 3.8% (with the pace of decline in this measure having slowed considerably in recent months).

The minutes of the Fed’s March meeting, at which the central bank reiterated that it needed greater confidence that inflation was heading sustainably towards 2% before cutting interest rates, were published yesterday. They noted, appropriately enough, that “monetary policy remained well positioned to respond to evolving economic conditions and risks to the outlook, including the possibility of maintaining the current restrictive policy stance for longer should the disinflation process slow.”

The Bank of Canada left interest rates unchanged at 5% following yesterday’s meeting, but its Governor said a rate cut is “possible” in June if inflation continues to moderate.

Next up it’s the ECB. It is set to keep policy on hold again at today’s meeting but is likely to signal a rate cut is on the cards for June, given the progress it has made in bringing down inflation.

There’s more inflation data scheduled in the US today – this time producer prices – with the regular weekly jobless claims due there as well.