Another adverse US CPI print this week with inflation in April at 8.3%, higher than the average forecasts of 8.1%. That’s a 13 year high with the prospect of more to come. Strong upward momentum was seen across all categories with services, energy and food being the leading cost drivers. US government debt is seeing some sustained selling; 10 year Treasury yields are up at 1.69% at last count.
Food prices in North America have consistently increased since last year as input costs continue to spiral upwards. New car prices surged higher on demand despite higher fuel and interest costs. While oil declined from its high in March, energy prices are still elevated as Russia’s war in Ukraine gets prolonged.
“While CPI seems to have peaked in March largely due to a softening in oil prices, inflation is still uncomfortably high and high inflation expectations are firmly embedded,” noted Rochelle Vaz, with the global capital markets team at Validus Risk Management. “This does not bode well for macro as the Fed will be forced to capitulate to raising its policy rate by more than 50 bps if the trend continues. The market will be keenly watching the May CPI print to assess how the Fed would react at its June meeting.”
The selloff in yields, that had taken a breather the last couple of days, has resumed with the 10-year UST up by 10 basis points and sitting firmly above the 3% level.
“The S&P 500, that recently traded through the psychological 4,000 level, is likely to open lower, with the next crucial level around 3,800,” said Vaz. “The dollar index has traded 0.40% higher within minutes of the data release. Market moves are reinforcing the belief that the Fed is well behind the curve and will need to do more to bring down inflation.”
Vaz said there is an evident rotation from the goods to services sector, which is largely driven by demand-side factors and falls under the scope of the Fed’s control (the has Fed indicated its tools don’t really work on supply shocks).
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More US rate rises to come
Federal Reserve board member Raphael Bostic commented that he was open to the idea of the Fed “moving more” on interest rates and traders are now factoring in 50bp rises at each of the next three Federal Reserve board meetings, in June, July and September.
The weakness washed over into Asia with markets in Hong Kong, Japan and Australia all seeing losses approaching 2% overnight.
The inflation numbers are being viewed as a big miss by Wall Street analysts. Core inflation in the US is up at its highest level since 1982. As predicted by this website in November, inflation is becoming a defining concern for markets in 2022.
The rise in the US CIP had a knock on effect on the gold market – gold slipped to around $1840. The gold:silver ratio rose to 86.5, which is its highest level since the dark days of July 2020. The gold price has lost significant ground since Russia’s invasion of Ukraine, and is down 10% from its peak in March.