Hot US CPI / FOMC Minutes
US inflation once again came in hotter than expected in March. The headline and core gauges rose 0.4%mom, resulting primarily from a spike in energy prices and shelter costs. From a year ago, the headline indicator advanced 3.5% (from 3.2%), while the core measure steadied at 3.8%.
Car insurance and hospital care prices also drove the “supercore” inflation print higher. The core services ex housing measure rose 0.7% last month, to a year-on-year rate of 4.8%, from 4.3% in February, and to its highest level since May 2023. However, it is worth noting that car insurance and medical care prices do not feed into the Fed preferred measure of inflation, core PCE deflator.
Following the release, US equities sold off, UST yields spiked higher, and gold fell off its all-time highs. The 10-year yield was nearly 17bps higher heading into last night’s auction, however, even that was not enough to entice buyers. The auction trialed by over 3bp, with dealers having to absorb nearly 25% of the reopening.
The only beneficiary was the dollar. The greenback rose to the highest level against the Japanese yen since mid-1990. Futures markets were quick to slice expectations for rate cuts this year, at time of writing they are now pricing in two rate cuts this year, down from three ahead of the numbers.
Not that backward looking information is of much use, given the recent robust US employment and hot inflation data, however, it would be remiss of us to not mention the March FOMC minutes released yesterday.
The March minutes noted that: "In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected. Participants remarked that in considering any adjustments to the target range for the federal funds rate at future meetings, they would carefully assess incoming data, the evolving outlook, and the balance of risks."
The market was also looking to the minutes for any clues on reducing the monthly pace of the Fed’s balance sheet taper, however little new insight was provided. If anything, the minutes simply reiterated what Chair Powell said last month. The minutes noted that most participants judged it would be prudent to begin slowing the pace of any runoff “fairly soon”.
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