Mid-Week Update
Pre-CPI Market Scan
The CPI day is finally upon us. Millions of traders will be glued to their screens in a few hours to look at a single-digit number, marvelling at the decimal places for clues about where inflation is headed.
We are turning into the number with rate pricing being at its most hawkish level since Q4 last year. I would expect any deviations from the expectation to have the most impact on immediate easing pricing, with the June/July start date being in increased focus.
The last few CPI prints saw equities trade better, with the front-end selling off marginally, while the USD was generally flat.
I have read a few research reports, and estimates are somewhat evenly distributed above and below the consensus. The striking aspect is that the real volatile components around core services and shelter are very hard to pin down. In keeping with the ongoing script, however, I wouldn’t be surprised to see a continuation of the stickier inflation narrative. It’s the pain trade for policymakers after they prematurely celebrated returning their mandated price gauge back towards target. Read my piece on previous inflationary periods and the lessons learned below.
Inflation Redux?
Last week’s US inflation readings did not allow for further disinflationary euphoria. While one data point doesn’t change the overall market narrative, some pressing questions must be answered. The fear of a second inflation round would indeed set shockwaves across all financial markets were it to materialise. For now, however, markets are shrugging it off and pushing out rate hikes, as the below chart for the US highlights.
Let’s now scan markets and what the models are telling us.