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US CPI is Unlikely to Tell Us Anything We Don’t Already Know

US CPI is Unlikely to Tell Us Anything We Don't Already Know

Overview:  Today's highlight is the March US CPI, and while everyone is talking about it, it is unlikely to tell us anything we do not already know. Headline price pressures are easing but the core rate is sticky, and despite comments from the Chicago Fed president about the need for patience, the odds of a hike next month have crept up. Understanding the Fed's reaction function, it seems clear that for most officials, inflation is remains too high and the labor market resilience suggests a further increase in rates can be absorbed. The FOMC minutes from the March meeting will be released late in today's session and insight into how the Fed was thinking about bank stress, which appears to have lessened.

Equities were mostly higher in the Asia Pacific region and Europe's Stoxx 600 is advancing for the third consecutive session. US equity futures are steady to firmer. Benchmark 10-year yields are up 1-2 bp with the US Treasury yield at 3.45%. The dollar is mostly softer against the G10 currencies but in narrow, mostly consolidative ranges. Among emerging market currencies, the Russian rouble continues to slump, while the Mexican peso and Hungarian forint (Hungary reported higher than expected March CPI (0.8% for a 25.2% year-over-year increase) are the best performers. Gold is holding above $2000 and is trading at a three-day high. June WTI is firm after yesterday's outside up day. It is knocking on last week's high (~$81.80).


Japan reported its third consecutive sharp decline in producer prices. They had peaked in December, rising 10.5% over the previous year. Producer prices slowed to 9.5% in January, 8.3% in February and 7.2% in March. Last month's year-over-year increase was the least since September 2021. This partly reflects the base effect. In Q1 22, producer prices rose around a 10% annualized pace. In Q1 23, they declined at a 1.2% annualized rate.

Recall that before the banking stress hit last month, the Topix index of bank shares reached nearly an eight-year high. The index fell by almost 11.6% last month, snapping a five-month rally, 38.5% rally. Bank lending (excluding trust banks) rose by 3.3% year-over-year in February, the best pace since April 2021. However, in March it stalled, slowing to 3.3% year-over.

Rising US rates are helped lift the dollar against the yen. It poked above JPY134.00 for the first-time mid-March. The JPY135 area is the next important hurdle and its large option strike by deter it. There are nearly $820 mln of options that expire there today and $1.85 bln tomorrow. There may be some resistance around JPY134.15, where $805 mln of options also expire today. Initial support now is seen around JPY133.50. Australia reports March jobs data first thing tomorrow. Some slowing is expected after nearly 75k full-time positions were filled in February. The Australian dollar continues to trade within Monday's range (~$0.6620-$0.6680). The daily momentum indicators favor the downside. There are options (A$545 mln) that expire today at $0.6700 and (~A$2 bln) tomorrow between $0.6600 and $0.6625. The yuan is little changed. It continues to trade in exceptionally narrow trading range since the start of the month. The dollar's reference rate was again set tight to expectations (CNY6.8854 vs. CNY6.8856). Following yesterday's low CPI print, China's 10-year bond yield slipped lower, and the settlement today was 2.82%, the lowest since last November. 


The economic diary for Europe is light today. It picks up tomorrow when the eurozone report February industrial production (median forecast is for a 1% gain after a 0.7% rise in January). The UK reports February GDP and details. Recall that January's GDP expanded by 0.3%, buoyed by services and a smaller trade deficit. The median forecast in Bloomberg's survey projects 0.1% growth in February. Industrial output and construction are expected to offset a small decline in services, while trade deficit may have narrowed. The market is a little more confident that the BOE hikes the base rate when it meets on May 11 than it is that the Fed hikes on May 3 (~80% vs. 74%). But it is most confident in a move by the ECB (~95%). 

The euro trades firmly. It rose slightly through $1.0935. Last week's highs were set near $1.0975. There are options for 3.1 bln euros at $1.10 that expire tomorrow. Although it reached $1.1035 in early February, it has not spent a whole session above $1.09 this year, but so far today it has. It has been confined to about a quarter-of-a-cent range above $1.0910. Sterling is also trading in a narrow range (~$1.2410-$1.2445) and holding below yesterday's high (~$1.2455). The slippage in the European morning has left the intraday momentum indicators oversold. A dip below $1.2400 may bring in new buyers.


A 0.2% increase in the March headline CPI translates into slightly more than a 4.4% annualized rate of increase in Q1 22. The pace in Q4 22 was around 3.2%. The median forecast in Bloomberg's survey calls for a 0.4% increase in the core rate. If accurate, the core rate increased by a little more than 5.2% in at an annualized pace. accelerating from the 4.0%+ of Q4 22. This coupled with a still strong, even if not quite as strong, labor market, encourages expectations for another Fed hike. The Fed funds futures market has about a 74% chance of a quarter-point move next month discounted. Despite comments from Chicago Fed President Goolsbee saying patience is needed, fanning some expectations of a dissent at next month's meeting, the odds of a Fed hike have crept up.

The FOMC minutes from the March meeting will be released later today and will be scrutinized for insight into the banking stress. Fed Chair Powell indicated a pause was considered. How close was it? Powell has steered the Fed through with a minimal of dissents. Goolsbee is the news voting member and recall that a couple of Fed governors did not approve his appointment. Some observers may highlight the risk of dissent, but it is not clear lasting impact. We continue to suspect that too much is made of splits in what appears to be the most diverse Fed in history. The real split is between the Fed, which says not rate cut this year and the market, which see the year-end rate a little below 4.50%.

The Bank of Canada announced a conditional pause in late January, and although the economy has begun the year a little stronger than it expected, there is no compelling reason to expect it to move today. The target rate is at 4.5%. March CPI will be reported next week. In February, it was 5.2%. It peaked at 8.1% last June. The Bank of Canada forecast its it to fall to 3.6% this year and 2.3% next year. The median and trimmed measures of core inflation have fallen below 5.0%. The swaps market continues to price in a cut before the end of the year.

The US dollar slipped to CAD1.3450, a four-day low. It has spent little time above yesterday's settlement (~CAD1.3465). Session highs, so far, were recorded in the Europe near CAD1.3470. The next important support area is near CAD1.3400. On the upside, the greenback faces resistance in the CAD1.3500-25 band. Options for around $950 mln expire tomorrow at CAD1.3525. The greenback continues to consolidate against the Mexican peso. It remains in Monday's range (~MXN18.0765-MXN18.2840). It is on the session lows in the European morning near MXN18.10. The intraday momentum indicators are stretched, suggesting little follow-through selling is likely in early North American turnover. 

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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