Yesterday’s US inflation data caused increased volatility in the market. We saw a few surprises, but their scale was so small that by the end of the day, there was no visible change in the value of the USD or Wall Street indices. Yields on US bonds picked up just after the data was released, then dynamically fell over the next few hours. The market still assumes that a March cut by the Fed is highly likely.
Let’s take a closer look at the numbers. The results weren’t groundbreaking, slightly deviating from market consensus. Consumer prices in the United States rose by 0.3 percent in December compared to November, this refers to both the core CPI and excluding fluctuating energy and food prices. The year-to-year index increased from 3.1 percent to 3.4 percent (forecast 3.2 percent) and the “core” dropped from 4.0 percent to 3.9 percent. A decrease to 3.8 percent was expected here.
The overall trend of moderate inflation decline remained unchanged. This is primarily evidenced by the base index. The prices of services, which are heavily influenced by wage costs, are still growing relatively strongly.
For the Federal Reserve, it is important that the last stage of bringing inflation back to the target appears to be more challenging. In my opinion, the Fed will not cut interest rates in March, as the market expects, but only in May or June.
The market reaction was not clear-cut. The dollar initially gained in value but gave up all the gains made in the following hours. EURUSD is still above 1.0950 this morning. Wall Street indices eventually closed the day around opening levels. US debt yields rose and then dynamically dropped, approaching the lows set at the end of last year.
Today, a reading of producer inflation in the USA is planned. Neel Kashakari from the Fed, who is considered a “hawk,” will speak.
Łukasz Zembik, Oanda TMS Brokers
This post first appeared in CEO Magazine.
