US inflation starts to turn lower
The US CPI inflation turned lower for the first time in 9 months, adding further weight to the argument that inflation is peaking in the States. Year on year headline CPI has slipped to 8.3% in April, down from 8.5% in March. The core CPI also dropped, to 6.2% from 6.5%.
However, market reaction is coming from the data which has been above estimates. The consensus had been looking for inflation to decline more than it did. The actual data came in slightly above forecasts which had been looking for 8.0% headline and 6.0% core.
However, the month on month growth of just +0.3% was the lowest since the summer of 2021 and reflects the moderating pricing pressures. The decline in energy prices is especially notable.
What does this mean?
The overall assessment is interesting as all the main inflation gauges (CPI, PCE and wages) are now ticking lower. Fed speeches (such as FOMC hawk Loretta Mester, a voter in 2022) have suggested that the Fed does not need to be more aggressive on monetary tightening (for example 75bps per meeting) if inflation begins to track lower.
Huge energy price rises have been a major contributory factor to the high levels of inflation, but a month on month decline suggests that this could now begin to turn into a drag.
This CPI data helps to affirm the view that the Fed should not need to go down the route of 75 basis points hikes. However, there has been an understandable reaction across markets to the upside surprise, as the peaking of inflation may not be happening as much as some had hoped. However, as the dust settles, this may begin to moderate again.
Initial Market Reaction
The main moves we are seeing are bond yields moving higher, and equity markets. In forex, the USD is looking more tentative, and this is also playing into the moves on gold too.
- Bonds – a broad sell-off on bonds across the curve is sending yields higher. The US 2 year yield is +11bps, with the US 10 year yield +11bps.
- Forex – a broad USD strengthening once more. However, interestingly there are already signs of a reversal kicking in. The USD has been showing a few signs of correction in recent days. This may restrict USD strength in the hours to come. EUR/USD has returned to almost flat, whilst USD/JPY is also beginning to roll over.
- Equities – US futures have fallen decisively, with the S&P 500 futures losing around -2% on this.
- Gold – fell initially, but is now looking to build support again.
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