US CPI cools but policy uncertainty keeps markets on edge

WHERE WE STAND – All eyes were on the latest US CPI figures yesterday, this week’s only major macro release.

Those figures delivered a cooler-than-expected surprise across the board – headline prices rising 0.2% MoM and 2.8% YoY, while core prices rose 0.2% MoM and 3.1% YoY, the latter being the slowest such pace since early-2021. Clearly, then, some much-needed good news on the inflation front, and a data slate that will please policymakers on the FOMC, especially with ‘supercore’ inflation also coming back below 4.0% YoY.

That said, let’s not get ahead of ourselves here. The journey back to the 2% inflation target will still be a bumpy one, and one where upside risks are plentiful, particularly given the Trump Admin’s tariff policies. Consequently, the data seems highly unlikely to move the needle in terms of the policy outlook – rates will remain on hold next week, with any cuts in the first half of the year unlikely at this stage, barring a material deterioration in labour market conditions. Still, the direction of travel for rates remains lower, though policymakers will continue to take a patient stance for the time being.

Predictably, however, there was a dovish cross-asset reaction to the CPI figures, with equities taking a knee-jerk move higher, Treasuries rallying across the curve, and the greenback dipping to fresh day lows as the data was digested. These moves were rather fleeting in nature, however, and pared very rapidly indeed, likely owing to the lack of significant impact that the data is likely to have on the policy outlook.

As such, the S&P traded all the way back to the flat-line, giving up an intraday gain of well over 1.5%, before ultimately ending in the green.

This, though, still strikes me as a market that simply cannot hold onto any gains at the moment, which should be a big old red flag for any potential dip buyers out there, while also reinforcing the idea that unless and until the present degree of policy uncertainty lifts, rallies are set to remain there to be sold into. Certainly, the CPI print doesn’t signal the ‘all clear’, with both economic and earnings growth expectations still having substantial room to re-rate lower, dragging the market down alongside.

Along with my bearish equity bias, I still favour a bullish bond view, particularly as risks increasingly tilt to the downside for the US economy, and in a more dovish direction for Fed policy, with it considerably easier to envisage a series of cuts this year, but nigh-on impossible to envisage a series of hikes. Buying 2s at 4% yesterday would’ve been a gift, if quick enough.

The FX market remains somewhat more intriguing, with price action again choppy yesterday, and the greenback ending the day roughly where it started. That said, I’d still be a USD-seller here, with the ‘US exceptionalism’ narrative now dead in the water, and with the buck being anything but a haven right now, given the huge susceptibility to the very tariff headlines that participants are trying to hedge against.

That said, a ‘pause for breath’ can’t be entirely ruled out in the short-term, at least, given how far we have come, in such a short space of time. The EUR, for instance, has rallied 5 big figures in a fortnight! Still, I’d not get overly concerned about such a pause, as a broader turn in the tide against the greenback seems unlikely unless downside growth risks miraculously dissipate, leaving EUR/USD at 1.10, GBP/USD at 1.30, and USD/JPY back down towards 145 as reasonable, if not slightly conservative, short-term targets.

LOOK AHEAD – A few bits and bobs of note on the economic docket today, though none should be massive market movers.

From the US, the weekly jobless claims figures will be worth a glance over, as participants continue to gauge the impacts of ongoing federal layoffs, though neither the initial nor the continuing claims print coincides with the survey week for the March payrolls print. Last month’s PPI figures are also due, and will be another input into modelling for the PCE inflation gauge at the end of the month.

Elsewhere, January’s eurozone industrial production figures are set to show a modest 0.6% MoM rebound at the beginning of the year, with five ECB speakers also due throughout the session ahead.

Finally, a US 30-year auction is on deck, wrapping up a chunky week of Treasury supply.