Headline CPI came in lower-than-expected printing at 5% y/y (5.2% y/y - forecast) and 0.1% m/m (0.3% m/m – forecast). Core CPI, which strips out volatile items such as food and energy, came in at 5.6% on an annual basis and 0.4% m/m. The numbers are still above the Fed's 2% target, but inflation does seem to be moderating.
In response, the US 2-year yield (top chart) declined 2.46%, but the candle is still to complete today and is subject to change. FXCM's USDOLLAR basket (bottom chart) has followed the yield down. Both instruments may be charting a lower peak. To confirm, they need to close below their reference candles' lows (black horizontal).
The CME FedWatch tool suggests a 75% probability that the Fed hikes by 25bps at its 3 May meeting. The US 2-year yield is often considered a proxy for Fed policy. That it is declining suggests that the current hiking cycle is near its peak i.e., May's hike may be the final in this cycle.
Shelter costs are interesting. They increased by 0.6% which is the smallest gain since November but were still up 8.2% on the year. This is an important component as it makes up a third of the CPI's weighting.
Pre-owned vehicles declined 0.9% m/m. Compared to the previous year, the prices for these vehicles have decreased by 11.2%. Additionally, medical care services costs also decreased by 0.5% during the same period.
Given sticky elements and if we get a softer landing over a harder landing, it remains to be seen if we will get cuts in the second half of the year. The Fed maintains that we won't get any cuts in 2023, but the CME FedWatch tool does have the Fed funds rate at 4.5% by year-end.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.