U.S. Indices closed Wednesday mixed, but that only tells half the story, as a broad-based hawkish reaction was seen on the hot US CPI report, before paring. As such, after all major metrics in the release topped expectations, US equity futures and Treasuries saw notable downside, while the Dollar soared to session highs and money market pricing shifting the first Fed 25bps rate cut to December, vs. Sept pre-data. However, as the session progressed US indices pared the majority of their weakness, with the NASDAQ 100 even closing green, and DXY flat at the time of writing but Treasuries held on to their weakness which saw the Japanese Yen reside as the G10 FX laggard against the Dollar. The Euro outperformed. Potentially behind some of the reversal was the more positive Russia//Ukraine rhetoric, whereby Trump said he has spoken to both Putin and Zelenskiy (separately) about ending the war. At the time of writing, we await President Trump’s latest signing of executive orders, but White House Press Sec said she believes the reciprocal tariff announcement will come before the Indian PM’s visit tomorrow, and will let the President discuss details. Fed wise, Powell, Goolsbee, and Bostic all spoke post-CPI (details below), whereby the Chair offered a note of caution on yesterday’s CPI reading and target PCE inflation which is a better measure; will know what PCE readings are late today, after PPI data. Sectors are predominantly in the red, with only Consumer Staples in the green, while Energy is the underperformer and weighed on by weakness in the crude complex amid the aforementioned newsflow on Trump calls with Putin and Zelenskiy about ending the war. In addition, the US 10 Year Auction was soft. Headline CPI rose by 0.467% in January, above the 0.3% consensus and accelerating from the prior 0.393%. The Y/Y print rose 3.0%, despite expectations for it to maintain a 2.9% pace. Within the headline figure, the index for shelter rose 0.4% in January, accounting for nearly 30% of the monthly all items increase. Energy rose 1.1% with gasoline +1.8%. Prices for food increased 0.4%, with food at home +0.5% and food away from home +0.2%. The sharp increase in food at home was largely due to the recent surge in egg prices (sharpest increase since June 2015). The Core metric rose 0.446%, above the 0.3% forecast, up from the prior 0.225%. The Y/Y print rose by 3.3% from 3.2%, despite expectations from a dip to 3.1%. It is worth noting that prior to the release, JPM noted if core CPI is +0.4% M/M or greater is it likely to be driven by a spike in Shelter as well as seeing some parts of Core Goods flipping from deflationary to inflationary. The hot data saw a marked shift in money market pricing with the next 25bps rate cut no longer priced until December from September before the data. The date reinforces the Fed’s “no rush” approach to policy, with the data suggesting the fed will need to hold rates for longer in order for inflation to return to target. Regarding the January data, it is just one hot report and the Fed will likely not want to make decisions based on one release, especially with plenty of data still due between now and the March 19th FOMC. Pantheon highlights that seasonals are still failing to offset new year price rises but the February data will reassure the FOMC. In his second day of testifying, this time in front of the House, the Fed Chair said the Fed makes its decision based on what’s happening in the economy and is reserving judgment on likely effects of tariffs until it sees the policies. Powell added he wants reserves to be ample and all evidence suggests reserves are abundant, and expects will return to the issue of lowering SLR. On inflation, they said they are close but not there, and the January inflation print says that as well, and wants to keep policy restrictive for now. The Chair added they want to see more progress on inflation and did not see much progress on core inflation last year, and have the luxury of being able to wait for that, given the strong economy. Following yesterday’s CPI, he offered a note of caution and said target PCE inflation is a better measure, and they will know what PCE readings are late today, after PPI data. Powell said long rates went up but it was not about inflation and Fed holding rates, awaiting evidence of lower inflation. Fed Member Goolsbee said if they got multiple months like this on CPI inflation, then the job is clearly not done and stated the latest inflation read is “sobering” and further added inflation data today is concerning, but just one month. Ahead, the Chicago Fed President still sees rates settling ‘fair bit below’ today.
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