Chief Investment Strategist
Summary: Hot US January CPI has closed the door for a March Fed rate cut. While PCE data will be more important, the debate has shifted to May or June for the start of Fed’s easing cycle, unless banking risks escalate. This has made dollar strength more durable as risks of SNB and ECB rate cuts ahead of the Fed could gain traction.
US January CPI came in above expectations, both on the headline and core measures. The hot inflation print disrupted the disinflation narrative and reaffirmed that the last mile of the inflation move to 2% could be bumpy.
Headline rose 3.1% YoY and 0.3% MoM, vs. 2.9% and 0.2% expected respectively. Core was steady at 3.9% YoY vs. an expected easing to 3.7% YoY, and rose on a MoM basis to 0.4% from 0.3% in December. Most of the upside surprise came for shelter, where a waiting game has been going on to see cooling in rents. Other major contributors to the upside were airline fares, medical care and education. Overall, sticky services inflation contributed significantly and the supercore measures that the Fed focuses on (see chart below) rose to 0.9% MoM, the highest level since April 2022.
While it is concerning that services inflation may be accelerating again, it is not surprising given the sticky trends seen in labor markets and wages. Goods disinflation has continued for now, but that has mainly come on the back of energy prices, while food prices also came in higher. What is even more concerning is that base effects in energy are coming to an end, and this could make inflation even more sticky from here.
The hot CPI report has priced out a March rate cut, now seen with only 10% odds. May rate cut probability has also dropped to less than 40% from ~70% previously and the first full rate cut is only seen in June.
Focus now turns to PPI report on Friday which could help to gauge what Fed’s preferred inflation measure PCE could come at. PCE has been trending lower than the CPI, and we could continue to get mixed messages on inflation. However, bigger picture encompassing the blowout January NFP report, recent jobless claims prints, and the Fed pushback to Q1 rate cut expectations means that the bar to price in a March rate cut again is very high, and the May rate cut expectations may also continue to be challenged.
While data-dependency is the order of the day, debate following the US January CPI report will also shift once more to “who cuts first”. The Fed was expected to lead the rate cut cycle this year as it usually does, but market pricing has shifted now and both ECB and Fed are expected to start cutting rates in June. ECB is still seen to cut in April with close to 50% probability, while the Fed’s May odds also stand at less than 50%. Commentaries from ECB speakers have also started to diverge, with some like Bank of Italy Governor Panetta saying that ECB will soon need to start cutting rates. The Bank of England, so far, is expected to delay the easing cycle as services inflation and wages remain sticky but there remains risk of dovish repricing if growth metrics undershoot expectations. Swiss CPI yesterday came in below expectations, and Swiss National Bank is now seen cutting rates as early as March.
The competitive pivot argument will likely be alive once again, and is likely to create interesting tactical opportunities in the FX space. Dollar strength appears to be more durable, and downside is seen for CHF and JPY. EUR and GBP also remain on data and commentary watch, with UK wages still remaining sticky, having come in higher than expected at 5.8% YoY for December, but still cooling significantly from 8%-levels seen last summer. Gold has broken below $2,000 support on hot US CPI and is testing 100DMA at $1,990.
Other recent Macro/FX articles:
14 Feb: Global Market Quick Take - Asia
13 Feb: Weekly FX Chartbook: US and UK disinflation story in focus, watch for ECB split widening
9 Feb: Japanese Yen is throwing a warning
8 Feb: FX 101: USD Smile and portfolio impacts from King Dollar
5 Feb: Weekly FX Chartbook: More and more reasons to stay long US dollar
1 Feb: FOMC out, BOE and NFP next – will the hawkish waves continue?
30 Jan: USD remains a tough sell even with a dovish Fed outcome
29 Jan: Weekly FX Chartbook: Earnings and geopolitics to take the focus away from Powell
25 Jan: US PCE Preview: March rate cut bets could pick up again
24 Jan: Markets could start to price in a Trump presidency
24 Jan: ECB Preview: Will EUR pay heed to the pushback to April cut expectations?
23 Jan: Podcast: Central banks and key figures run the show
22 Jan: Video: The Curious Investor - Q1 2024 FX and Commodities Outlook
22 Jan: Weekly FX Chartbook: Soft-landing hopes and US exceptionalism will remain at play
19 Jan: A reality check on Bank of Japan’s policy normalization and JPY appreciation expectations
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy