Sat, Jan 28, 2023 @ 19:06 GMT
HomeContributorsFundamental AnalysisCPI Recap: Core Inflation Surges, Cementing a 75bps(+?) Fed Hike Next Month

CPI Recap: Core Inflation Surges, Cementing a 75bps(+?) Fed Hike Next Month

In our CPI preview report, we noted that a hotter-than-expected US inflation reading, especially on the more predictive “core” (ex-food and -energy) reading, could put the proverbial nail in the coffin for another 75bps interest rate from the Fed to start next month.

As it turns out, the market is suggesting that may not have been aggressive enough!

Headline CPI printed at 0.4% month-over-month and 8.2% year-over-year while the “Core” CPI reading came in at 0.6% m/m and 6.6% y/y. Both readings were above economists’ expectations, suggesting that inflation may be more intractable than previously thought. Digging into the details, the big factor driving the hotter-than-anticipated print was shelter inflation, which rose 6.6% y/y to the highest level on record; similarly rent inflation came in at 7.2%, a record high of its own.

According to the CME’s FedWatch tool, Fed Funds futures traders are now pricing in a 90%+ probability of yet another 75bps interest rate increase from the Federal Reserve in three weeks’ time, with some traders even pricing in an outside chance at a full 100bps rate hike! Likewise, a total of at least 150bps of rate hikes by the end of the year is now the market’s base case as the Fed continues to scramble to catch up with rising prices.

Market reaction

Traders, already on edge after months of sticky inflation and surging interest rates, are opting to sell risk assets first and ask questions later. The monetary policy-sensitive 2-year Treasury yield has spiked nearly 20bps to test 4.50%, its highest level in 15 years, and major US indices are falling nearly 3% from their pre-CPI levels ahead of the open. Both gold and oil are dumping on the broad-based strength in the US dollar, and the US dollar index (DXY) is nearing its 20-year highs around 115.00 as we go to press.

Source: TradingView, StoneX
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Featured Analysis

Learn Forex Trading