The US inflation report released yesterday weakened the US dollar and caused a drop in US Treasury yields while boosting stock indices on Wall Street and in Europe. In April, the pace of price increases slightly slowed, although inflation remains above the Federal Reserve’s target. Nevertheless, market bets on interest rate cuts in September and December this year have increased.
In the first quarter of this year, prices rose more sharply than expected. In April, there was a slight decrease, with data virtually in line with the consensus. Yesterday’s data is a small step in the direction the Fed desires. Certainly, more reports confirming a further reduction in inflationary pressure are needed before the Federal Reserve decides to ease restrictive monetary policy conditions.
Consumer prices in the US rose by 0.3% in April compared to March, slightly weaker than the consensus. On an annual basis, the CPI stood at 3.4%, a 0.1 percentage point decrease. The more significant core measure, excluding food and energy, also came in at 0.3% m/m, with a year-on-year decline from 3.8% to 3.6%.
Following yesterday’s reaction of the dollar, stocks, and Treasury bonds, it can be assumed that the market expects a less “hawkish” Fed this year. A June rate cut is very unlikely at this point. The likelihood of a September move has slightly increased, with the market now pricing in nearly a 60% chance of such a scenario. There is also a chance for another easing step in December this year.
To some extent, the markets breathed a sigh of relief and switched to a decisive risk-on mode. All three major US indices, Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, rose sharply and set new all-time highs. The dollar weakened. The EUR/USD exchange rate approached 1.09, reaching its highest level since March 21 this year. Notably, the quotes “broke through” the upper limit of the downward channel that has persisted since the end of last year. The zloty benefited from yesterday’s publication as well. The EUR/PLN exchange rate fell below 4.26, and the USD/PLN set a new local low at 3.9117, matching the lows from April 10, 2024.
Despite the decline in inflation, Fed officials spoke in a relatively hawkish tone. Minneapolis Fed President Neel Kashkari stuck to the theme of higher rates for a longer period. He said the institution might need to keep them at their current level for “a bit longer” and questioned how much they are constraining the economy. For him, it remains uncertain how much pressure monetary policy exerts on the economy. Chicago Fed President Austan Goolsbee welcomed the CPI inflation slowdown but said there is still room for further disinflation. Fed Vice Chair Philip Jefferson acknowledged that monetary policy is restrictive but noted that the lack of progress on inflation in the first quarter is concerning.
Łukasz Zembik, Oanda TMS Brokers
