The US client inflation report yesterday got here in roughly inside estimates and that reaffirmed the prevailing narrative on the Fed outlook. That being the central financial institution will probably transfer to the sidelines in June. Fed funds futures are actually displaying 95% odds of that being the case however by way of pricing, it hasn’t modified a lot from final week:
The primary charge reduce priced in continues to be in September, adopted by two extra charge cuts priced in for November and December this yr.
That is not a lot of a change in any respect from the FOMC assembly choice final week. As such, the inflation numbers yesterday are solely serving to rebuff the narrative however probably not including or subtracting from it.
If you wish to drill deeper into the small print, this chart is a good reference to how inflation developments are taking part in out:
As you possibly can see, items inflation is beginning to fall off with power worth inflation already sitting in detrimental territory – the primary time because the begin of 2021. Nevertheless, we’re seeing a transition whereby providers and meals inflation is carrying the majority of the load now and that’s holding core inflation pressures elevated.
It should take many extra months to gauge the underlying pattern and to see if there might be any additional drop off in worth pressures.
And till we will type that out, markets is not going to have a simple time working with the continuing elementary outlook and buying and selling narratives.
We’ve got reached the purpose the place the Fed is pausing, which confirms the beginning of a possible pivot. However whether or not or not the pivot will come and the way rapidly will probably be, is determined by inflation developments within the months forward.
So, except there are any main surprises within the information, markets will stick with what they assume is correct i.e. Fed will ultimately flip the nook and reduce charges as inflation pressures are to ease additional.
However at every step that stated narrative will get challenged, count on there to be corrections in pricing. And for that, we must maintain ready on the information.
In between that interval, issues may get somewhat uneven with none actual sense of main path; all else being equal. Nicely, at the least for now.