It appears that the optimistic message on disinflation sent by Federal Reserve Chair Jerome Powell continues to resonate loudly with investors. Core CPI rose by a hot 0.4% month-on-month in February, higher than the consensus 0.3%, but the market reaction has been very contained compared to a month ago when inflation surprised by a similar margin. Indeed, the actual whisper number was closer to 0.4%, but that does not make the rally in US equities after the release any less surprising. We think, instead that markets continue to rely quite heavily on Powell’s relatively dovish testimony, which has made rate cut expectations arguably stickier.
The Fed funds futures curve has shifted only modestly lower compared to the start of the week, still pricing in 19bp of easing at the June meeting, and 85bp by December. Last Thursday, before jobs data were published, the December contract was trading at 92bp, meaning that the combined effect of higher-than-expected payrolls and hot inflation has been a mere 7bp.
If we don’t see a delayed bearish correction in risk sentiment by the end of the week, we can probably expect this dovish asymmetry in markets’ reaction to data to stay. Today, there are no data releases except for MBA mortgage applications, and the Fed is in the blackout period ahead of next week’s meeting. The 30-year Treasury auction will be more interesting to watch following soft demand for 10-year notes yesterday.
The hot CPI should warrant a stronger dollar from these levels, and we think there is a good chance that the dollar will find more support in the coming days.
Francesco Pesole
