Hotter-Than-Expected US CPI Prompts Hawkish Repricing!
Data came in broadly higher than expected for the March US CPI inflation print.
Higher-Than-Expected Reports on Three of the Four Major Prints
Year-on-year headline CPI inflation for March rose +3.5%, up from +3.2% in February and a touch higher than economists’ estimates of +3.4%. Of note, this follows a rise of +3.4% in December 2023, a rise of +3.1% in January, and a rise of +3.2% in February. It also marks the fourth consecutive month that we have seen headline inflation beat estimates.
Month-on-month headline CPI inflation came in at +0.4%, matching February but higher than the expected +0.3% estimate. On the core side of things, year-on-year inflation saw consumer prices rise +3.8%, matching February’s print and slightly higher than market estimates of +3.7%. Between February and March, core CPI inflation rose +0.4%, matching February but higher than the expected +0.3% estimate.
What’s immediately noticeable here is that while it was undoubtedly a hotter-than-expected inflation release, three of the four reports noted above were in line with the prior releases; the only outlier was nominal YoY CPI inflation, which jumped +3.5% from +3.2%. From this, although it is not what the Fed wants to see and does stress stickiness, it is not a release that underscores a reflationary phase just yet. The question, therefore, is whether this is still a bump in the road for the Fed’s 2.0% inflation target or something more; one thing is for certain, though, is that it has made the task of choosing a timeline when to ease policy a little more complex (as a note, although the Fed takes into account CPI inflation, the central bank actually targets headline PCE inflation).
In terms of the main drivers behind the CPI gains, the Bureau of Labor Statistics (BLS) noted the following:
‘The index for shelter rose in March, as did the index for gasoline. Combined, these two indexes contributed over half of the monthly increase in the index for all items. The energy index rose 1.1 percent over the month. The food index rose 0.1 percent in March. The food at home index was unchanged, while the food away from home index rose 0.3 percent over the month’.
Market Snapshot
The immediate market reaction saw the US Dollar Index rally along with US Treasury yields; we also saw spot gold (XAU/USD) pull back from all-time highs, together with major US equity index futures moving lower. Fed rate pricing observed a sizeable hawkish move, with the OIS curve now pricing in -49bps for the year as of writing. This is down from -69bps prior to the inflation release and down from -150bps at the beginning of the year.
The recent dollar upside forced the USD/JPY higher, further fuelling fears of a BoJ intervention as the pairing begins to toy with space north of the ¥152 handle. Below is the USD/JPY chart for the monthly timeframe. While we are now refreshing multi-decade highs on USD/JPY, meaningful monthly resistance is seen overhead: channel resistance, extended from the high of ¥125.85.
Higher-Than-Expected Reports on Three of the Four Major Prints
Year-on-year headline CPI inflation for March rose +3.5%, up from +3.2% in February and a touch higher than economists’ estimates of +3.4%. Of note, this follows a rise of +3.4% in December 2023, a rise of +3.1% in January, and a rise of +3.2% in February. It also marks the fourth consecutive month that we have seen headline inflation beat estimates.
Month-on-month headline CPI inflation came in at +0.4%, matching February but higher than the expected +0.3% estimate. On the core side of things, year-on-year inflation saw consumer prices rise +3.8%, matching February’s print and slightly higher than market estimates of +3.7%. Between February and March, core CPI inflation rose +0.4%, matching February but higher than the expected +0.3% estimate.
What’s immediately noticeable here is that while it was undoubtedly a hotter-than-expected inflation release, three of the four reports noted above were in line with the prior releases; the only outlier was nominal YoY CPI inflation, which jumped +3.5% from +3.2%. From this, although it is not what the Fed wants to see and does stress stickiness, it is not a release that underscores a reflationary phase just yet. The question, therefore, is whether this is still a bump in the road for the Fed’s 2.0% inflation target or something more; one thing is for certain, though, is that it has made the task of choosing a timeline when to ease policy a little more complex (as a note, although the Fed takes into account CPI inflation, the central bank actually targets headline PCE inflation).
In terms of the main drivers behind the CPI gains, the Bureau of Labor Statistics (BLS) noted the following:
‘The index for shelter rose in March, as did the index for gasoline. Combined, these two indexes contributed over half of the monthly increase in the index for all items. The energy index rose 1.1 percent over the month. The food index rose 0.1 percent in March. The food at home index was unchanged, while the food away from home index rose 0.3 percent over the month’.
Market Snapshot
The immediate market reaction saw the US Dollar Index rally along with US Treasury yields; we also saw spot gold (XAU/USD) pull back from all-time highs, together with major US equity index futures moving lower. Fed rate pricing observed a sizeable hawkish move, with the OIS curve now pricing in -49bps for the year as of writing. This is down from -69bps prior to the inflation release and down from -150bps at the beginning of the year.
The recent dollar upside forced the USD/JPY higher, further fuelling fears of a BoJ intervention as the pairing begins to toy with space north of the ¥152 handle. Below is the USD/JPY chart for the monthly timeframe. While we are now refreshing multi-decade highs on USD/JPY, meaningful monthly resistance is seen overhead: channel resistance, extended from the high of ¥125.85.