News & Analysis

Following Friday’s strong jobs report, pricing of the Fed’s policy path in US money markets had become a bit more sympathetic to the central bank’s “higher for longer” narrative as 21bps of cuts had been priced out of the December OIS contract. For traders to continue pushing back on expectations of an imminent and aggressive easing cycle, April’s inflation data needed to come in hotter than expected.

However, with headline and core inflation both coming in at 0.4% MoM, prices developed as expected in April. Due to base effects, headline inflation printed at 4.9% YoY, a tenth below expectations, and the core measure printed in line with consensus at 5.5% YoY.

Not only did the aggregate figures not meet the threshold required for fewer rate cuts to be priced, but with 89% of the monthly increase in headline inflation generate by just shelter (+0.15pp), used cars (+0.11pp), and gasoline (+0.10pp), the details of the CPI report were also soft. This is exemplified by the continued reduction in the Fed’s supercore inflation measure, 3mma annualised core services ex shelter, which fell a full percentage point on the month to 4.1% YoY. On a standard YoY basis, this same measure of underlying inflation also fell 0.73 percentage points on the month to 4.96%. Furthermore, components reflecting wage or discretionary spending pressures, such as full service meals (+0.1%), other recreational services (+0.2%), and airline fares (-2.6%), showed either subdued or negative price growth on the month.

Furthermore, core goods inflation excluding the volatile used cars and trucks index continued to reflect the improvement in supply chains as it fell from 0.33% MoM to just 0.04%, its softest reading since February 2021.

It is worth noting that despite the strong contribution from shelter, the pace of inflation in that component eased from March. This is largely due to the -3% MoM decline in lodging away from home, with both rent of primary residence and owners’ equivalent rent printing around 0.5-0.6% MoM as they did in March.

Both headline and supercore inflation ease in April

Following the release of the report, money markets priced out some chance of a Fed hike in June, lowering the estimate by 5pp to 10%, while 6bps worth of rate cuts were priced back into the December OIS contract. This weighed on US Treasury yields, with the main body of the curve falling by 6bps. Immediately after the release, the DXY index fell 0.6%, with currencies most sensitive to US rates (NOK, NZD, and JPY) leading gains, however, traders partially faded the move as they digested the data. Meanwhile, US equity futures jumped higher and the VIX fell by -1.6 points to 16.4, which is well below the 20 threshold viewed as a sign of high implied volatility.

We think this is the correct interpretation of the latest inflation data given the narrowing nature of inflationary drivers and the continued improvement in the Fed’s favoured gauge of underlying price pressures. In light of today’s release, our confidence in the view that last week’s rate hike from the Fed was the last of this cycle has increased.

The broad dollar index jolts lower as bets on rate cuts are put back into the USD OIS curve 



Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst



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