Stock indexes in the USA gained again despite worse inflation data. The U.S. dollar appreciated and gold reduced its valuation. The yields of U.S. bonds increased on both the short and long ends of the yield curve. Yesterday concerns increased that the CPI index is not falling as quickly as the Fed would like.
A month ago, the sharp rise in consumer prices in the U.S. in January, especially as measured by the core index excluding volatile energy and food prices, raised doubts among many investors that inflation would quickly fall back to the central bank’s target. Thus, it was expected that yesterday’s data for February would shed light on to what extent these were one-off effects or whether the decline in inflation is slowing.
Consumer prices in the U.S. increased by 0.4% in February compared to the previous month, in line with expectations. The year-on-year index rose from 3.1% to 3.2%. The more important core index, which does not include energy and food, was 0.4% month-to-month, slightly above consensus. Year-on-year it fell from 3.9% to 3.8%.
Services continue to be the main source of price growth dynamics. They grew by 0.5% reflecting a significant wage increase. Last month, the prices of goods partially compensated for this, now they increased by 0.1%. The overall CPI was higher due to an increase in fuel prices. Air fares also became more expensive. What may please the Fed is the decrease in “supercore” inflation, which excludes food, energy, and the so-called category of shelter.
After yesterday’s publication, the market did not change its valuation of the future path of interest rates in the U.S. It still gives just over 60% chances that the rate cut cycle will begin in June. The market’s assumptions are now close to the December conclusions drawn from the “dot plot” chart, suggesting 3 cuts in 2024 totaling 75 basis points. Next week we will receive an update of the median expectations of Fed representatives, which may shed new light on further prospects of monetary policy.
Yesterday’s data confirm the Fed’s caution, which has not yet declared victory over inflation and preferred to wait for further publications. If these prove to be negative (read: higher), then the Fed may reject the classic cycle of regular cuts and decide only on gradual adjustment of the key parameters of its monetary policy, which would be beneficial for the USD. However, such a turn of events is purely theoretical at this point.
EUR/USD rate declined yesterday to the round level of 1.09 and is currently slightly above this level. Gold fell to 2160 USD and has thus moved away from the records set on Friday after NFP data. The stock market grew despite higher CPI indicators, with the tech-heavy Nasdaq Composite up 1.5% and the broader SP500 up 1.1%. The Zloty lost value. The EUR/PLN rate rose above 4.29 and USD/PLN was above 3.93.
– Łukasz Zembik Oanda TMS Brokers
