US CPI to set the tone for Fed rate policy.


It was a quiet session overnight ahead of key risk events later in the week (US CPI is on Wednesday and bank earnings are on Friday, including Wells Fargo, Citigroup and JP Morgan). There was plenty of news flow, but not overly market moving. The IMF downgraded global growth by a tenth to 2.8% for 2023 and warned risks were to the downside given recent financial turmoil. In the same vein the newest US Fed member Goolsbee (voter) from the Chicago Fed warned “at moments like this of financial stress, the right monetary approach calls for prudence and patience”.

Despite those headlines yields are up modestly with the US 10yr +0.9bps to 3.43% and the 2yr +1.2bps to 4.02%. Fed Funds Pricing is little changed with a 72% chance of a May rate hike, followed by 63bps worth of cuts in H2 2023. Across the pond yields are up by more in catchup to US moves over the Easter break with the 10yr Bund yield +12.8bps to 2.31%. Equities were mixed with the S&P500 -0.0% and Eurotstoxx50 +0.6%. The USD is weaker with the DXY ‑0.4%, and modest gains were seen for EUR (+0.6%), GBP (+0.4%) and CAD (USD/CAD -0.4%). The AUD is also up +0.3% and got some support in APAC yesterday around headlines of China-Australia relations continuing to thaw with some talk of barley restrictions being reviewed. Meanwhile the NZD has underperformed -0.3%

March’s Consumer Price Index (CPI), slated for release Wednesday, is expected to come in at 5.2%, a slowdown from February’s 6% annual gain, according to estimates from Bloomberg.

The number would mark the slowest annual increase in consumer prices since May 2021 but would still be significantly above the Federal Reserve’s 2% target. The Fed has been raising interest rates to try to bring down inflation, but the central bank risks sending the economy into a recession by hiking rates too high too fast.

On a monthly basis, consumer prices are expected to have risen 0.2% in March, down from a 0.4% increase in February.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in March are expected to have risen 0.4% over the prior month and 5.6% over last year, according to Bloomberg data.

“Core inflation, and core services, should remain sticky-high,” Bank of America analysts wrote in a note Monday, adding that “much of this stickiness stems from elevated rent and owners’ equivalent rent inflation, which should subside in the second half of the year.” Owners’ equivalent rent is the hypothetical rent a homeowner would pay.

Here’s what to expect compared to the prior month’s reading:

    CPI YoY: +5.2% expected vs. +6% in February

    CPI MoM: +0.2% expected vs. +0.4% in February

    CPI “core” YoY: +5.6% expected vs. +5.5% in February

    CPI “core” MoM: +0.4% expected vs. +0.5% in February

The Federal Reserve in 2021 and early 2022 misjudged inflation as transitory, then was forced to hasten rate hikes to slow the economy. The uncertainty over its policy path has made CPI data one source of heightened market volatility during the past year.

Over that time, the S&P 500 has moved, up or down, 1.9% on average on CPI day, more than twice as much as it did in the previous 12 months.

The index has advanced 7% since January, partly on speculation the Fed will reverse course and ease monetary policy later this year as the probability of a recession has increased.

Flood’s scenario analysis provides a view into the risks facing investors Wednesday. One of their challenges is that inflation is measured in various ways.

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