Tomorrow’s release of the US CPI data might provide confirmation for the market or another dose of reality. But even if it’s the latter, it seems that optimism seems to win out in the end. The data might be set to generate volatility, but that doesn’t mean it will be enough to change the trend.
Something important happened at the start of the month. And it wasn’t the Fed’s rate decision or the NFP data that came right after it. Rather, what was more important was the reaction, and how quickly the market simply absorbed the information into what appears to be a pretty set narrative.
Turning a Really Big Ship
In his post-rate-decision presser at the end of last month, Fed Chair Jerome Powell pushed pretty hard against a rate decision in March. He then went on 60 Minutes, which aired after the blowout NFP numbers, to insist on the course of tightening. He went so far as to provide some mild criticism of government spending, which is seen as the driving force behind inflation.
The Fed is clearly trying to signal to the market that expectations for monetary policy easing this year are a bit overblown. That is, assuming what has now become the consensus that the US will have a “soft landing”, and there will be no major financial crisis to prompt emergency rate cuts. But the market doesn’t seem to be listening. Even after the latest data and official pushback, futures markets are still pricing in 6 rate cuts this year. There is no longer a consensus that the first cut will happen in March – it was just pushed to the next meeting in May.
Just Keep Doubling Down
In his 60 Minutes interview, Powell referenced the analogy of it taking a long time to turn a big ship. He was referencing the economy, but it might as well apply to the markets. Since October, there has been a lot of expectation that the Fed will turn to easing. But the data hasn’t been there to support the view. Yet the market hasn’t made a “pivot”.
The question for traders now is whether that pivot will happen with the data or not. Following the last FOMC meeting, there was a pull-back in investor risk taking. For a day. Then the market went right back to behaving as if easing was still happening. That could be the situation once again with the upcoming inflation data. Even if prices keep rising at a rate well above expectations, the reaction from the market could fade relatively quickly. On the other hand, a miss in the data would likely be in line with what the market already expects, which could limit the downside for the green back. (Or upside for assets priced in dollars.)
What to Look Out For
Annual inflation in the US is expected to come back to 3.1% from 3.4% prior, aided in large part by slowing energy costs. On a monthly basis, the inflation rate is expected to remain unchanged at 0.2%. For the core rate, which is more closely tracked by the Fed, the situation is similar, with the annual rate expected to come down to 3.7% from 3.9% prior, and the monthly rate to remain unchanged at 0.3%.
The figures suggest that inflation will still be reported as higher than expected, and would keep the bias of the Fed towards hiking. But it also points to maintaining the current situation for one more month, with the next Fed meeting likely to maintain the status quo.
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