LiveWire

US stocks jumped following softer CPI print. Investors are relieved that the March inflation data did not overshoot consensus estimates.

US consumer prices are accelerating at a rapid rate, 7.5% since last January, highest rate since 1982. Yesterday's CPI print is causing a lot of volatility in the markets as investor are repricing assets for different scenarios. The Feds fund futures show traders putting a 72% probability for a 50 basis point rate hike in March. Just two days ago that probability was below 30%. Interestingly, so far, we did not have any pushback from Fed members regarding market's reaction and anticipations of number of future rate hikes, something that we did witness from the ECB as French central bank governor and ECB policymaker Francois Villeroy stated markets may be overreacting following Lagarde's meeting. After the rocketing jobs report and now the hot CPI, pressure is building on the Fed to act quickly.

Inflation surprised once again to the upside. Prices increased 0.6% compared to last month (vs. consensus +0.4%) and 7.5% from prior year. Additionally, the December print was revised higher. Stocks were trading higher since yesterday hoping to see a moderation of inflation momentum. Alas, that didn’t happen. The S&P500 futures dropped 40 points following the print and yields are shooting higher across the curve, with the 2-year and 10-year surging 5 and 3bps, respectively. Keep in mind the FOMC minutes coming out next Wednesday will very likely have a hawkish bias to them as well. 

The US job creation was very strong in January, exceeding everybody's expectations. The Nonfarm Payrolls for last month came in at 467'000 nearly doubling the highest estimate in the Bloomberg economist survey. Additionally, hourly earnings growth was also upbeat at 0.7% mom (vs 0.5% expected). Recovery in jobs and higher wages pushed yields across the curve higher, as this increases the odds of a hawkish response from the Fed in March. The dollar gauge (DXY) also spiked on the back of rising yield and caused gold and other commodities prices to dip.

Fed Chief, Powell, confirmed it will complete its monthly bond-buying in March and signalled a rate hike for the same month. It plans to let bonds mature as a method to reduce its balance sheet over time and has not decided on the timing and pace of balance sheet reduction. It restated that inflation is high and well above the Fed's target. It added, the US economy no longer needed a sustained high level of policy support. In sum, the Fed made no particular change to its previous communications. US Fed futures imply 4 rate hikes. The yield on the US 10 year Treasury Note stands at 1.84%, up from 1.78%. Markets are volatile and significantly lower following Fed Chair's press conference.