After the release of the CPI data, the market's bets on the likelihood of a Fed rate hike in May decreased, leading to a surge in gold, silver, and oil prices, a continuous decline in the US dollar index, and a狂欢 for non-US currencies...
At 20:30 on Wednesday, the US Department of Labor announced the CPI data for March. The US March unadjusted CPI annual rate recorded at 5%, lower than the expected 5.2% and the previous value of 6.00%. The US March unadjusted core CPI annual rate recorded at 5.6%, in line with expectations, with the previous value at 5.50%, ending a five-month decline. The US March seasonally adjusted CPI monthly rate recorded at 0.1%, with expectations at 0.20% and the previous value at 0.40%.
Following the data release, spot gold prices rose by more than $10 in a short term, currently reporting at $2022.1 per ounce. Spot silver prices rose by $0.4 in a short term, currently reporting at $25.48 per ounce. The US dollar index continued to decline, falling by more than 50 points in a short term, currently reporting at 101.56. Non-US currencies collectively rose, with the British pound against the US dollar rising by more than 50 points in a short term, currently reporting at 1.2452; the euro against the US dollar rose by more than 40 points in a short term, currently reporting at 1.0965; the US dollar against the Japanese yen fell by more than 70 points in a short term, currently reporting at 133.15. The New Zealand dollar against the US dollar rose by nearly 50 points in a short term, currently reporting at 0.6236, and the Australian dollar against the US dollar rose by more than 50 points in a short term, with a daily increase of more than 1%, currently reporting at 0.6721. The US dollar against the Swiss franc broke below 0.90, reaching a new low since June 2021.
Both US and Brent crude oil prices rose by $0.7 in a short term, currently reporting at $82.2 per barrel and $86.29 per barrel, respectively.
US stock index futures quickly rose, with Dow futures up by 0.6%, Nasdaq futures up by more than 1%, and S&P 500 index futures up by 0.7%.
After the release of the US inflation data, US short-term interest rate futures prices indicated a reduced likelihood of a 25 basis point rate hike by the Fed in May. According to the CME "FedWatch": the probability of the Fed maintaining interest rates unchanged in May is 36.5%, and the probability of a 25 basis point rate hike is 63.5%. The swap market indicates that the Fed's benchmark interest rate is expected to be 50 basis points lower than the current level by the end of the year.
The European Central Bank's Euro Short-Term Rate (ESTR) for November 2023 fell from 3.578% before the release of the US CPI data to around 3.53%, indicating that the peak of the European Central Bank's deposit rate is about 3.65%.
The US Bureau of Labor Statistics stated that, so far, housing inflation has been the largest contributor to the overall CPI growth rate. The monthly increase in housing inflation offset the monthly decrease in energy inflation, with the energy inflation monthly rate recording at -3.5% in March, and all major energy component indices recording a decline in March. The food inflation monthly rate recorded at 0, while the household food index decreased by 0.3%.
Institutional comments on US inflation:
In March, energy prices fell while food prices remained flat, which explains why the overall CPI only rose by 0.1% compared to the previous month. The lower volatility core CPI continued to rise, indicating that the current level of inflation may persist. The Fed may raise interest rates by another 25 basis points and then maintain the interest rate unchanged for the rest of the year.CPI data below expectations may not stop the Fed's May rate hike pace
Charles Schwab believes that the Federal Reserve may continue to raise interest rates in May. The institution believes that:
The decline in inflation rates is welcomed by investors, who may speculate that the Fed may soon pause the monetary tightening cycle. That being said, despite the decline in inflation rates, they are still far above the Fed's 2% target. Officials have been focused on fighting inflation and may decide at the FOMC meeting later this month that further tightening of policy is needed to achieve their goals.
Wells Fargo believes that despite some optimism in today's data, inflation rates are still far from 2%, and there is no reason to believe that this would cause the Fed to pause rate hikes in May.
Prudential Asset Management's Chief Global Strategist Seema Shah believes that U.S. inflation is expected to decelerate further this year, "but very slowly." A slowdown in economic activity and the labor market is likely to mean an unemployment rate higher than the current 3.5%, which would be a necessary condition to alleviate inflationary pressures.
The head of the IMF's Fiscal Affairs Department said that the U.S. CPI in March shows ongoing inflationary pressures, which confirms the emphasis of the International Monetary Fund's spring meeting on the need to combat inflation and maintain macroeconomic stability.
NBC News, citing analysts, said that some of the main drivers of the post-pandemic inflation surge are weakening, such as supply chain issues, and some food and energy price increases triggered by the Russia-Ukraine conflict. However, the still hot job market is fueling inflation, with the job market having added 1 million jobs in 2023. Bankrate analyst McBride said:
Even if inflation continues to slow down, it will not completely reverse. It is only in very rare cases, and even during some economic recessions, that the annual inflation rate will record a negative number.
Barclays believes that gasoline prices are expected to rise in the coming months, thereby affecting the decline in inflation. In March, U.S. gasoline prices fell by 4.6%, a decrease of 17.4% compared to the same period last year. Data from the American Automobile Association shows that the national average price of regular unleaded gasoline on Tuesday was $3.60 per gallon, lower than the approximately $5 in June. However, Barclays expects that due to the recent production cuts by OPEC+, gasoline retail prices will rise again in the coming months, thereby preventing the overall inflation rate from falling more quickly.
TS Lombard's Chief U.S. Analyst Steve Blitz said:"This will not have an impact on the Federal Reserve. The issue of inflation will not disappear on its own; it requires a higher unemployment rate to be resolved."
Moody's economist Bernard Yaros stated that the pace of commodity price increases has slowed, a process known as disinflation, but this has essentially come to an end. He expressed:
"At least in the short term, many of the benefits we gained from repairing the supply chain have been realized, and we cannot expect this to become the main source of future disinflation."
Convera's Senior Market Analyst in Washington, Joe Manimbo, believes that the overall decline in U.S. inflation exceeded expectations, which supports the idea that the Federal Reserve will raise interest rates one more time and then pause. With the inflation rate dropping significantly from 6% to 5%, if this trend continues and we see a sharp economic slowdown, the Federal Reserve would have room to lower interest rates later this year.
- 2 July'24
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