CPI Springs A Surprise

WHERE WE STAND – Every man and his dog had spent the week waiting for yesterday’s January US CPI figures, and those hoping for a surprise weren’t disappointed.

The data came in hotter than expected across the board – headline prices rising 0.5% MoM & 3.0% YoY, core prices rising 0.4% MoM & 3.3% YoY. Those figures, importantly, are also trending in the wrong direction, with annual headline acceleration having accelerated in every month since last September, and core prices having not fallen below 3% YoY this cycle. Clearly, this sort of data makes grim reading for the FOMC, with disinflationary progress back towards the 2% target at best having stalled, and at worst being reversed.

While there were some one-off factors influencing the figures, such as a sharp increase in shelter costs, and a substantial rise in egg prices, the data is no yolk, and can’t simply be shrugged off as a ‘one-off’ or ‘temporary’ rise in prices.

In fact, the January inflation data reinforces the Fed’s default position as one of remaining on the sidelines, maintaining a patient stance, and being in no hurry to deliver a rate cut. The economy simply does not need it! Clearly, the chances of a prolonged pause in the easing cycle have now risen considerably, with the USD OIS curve now discounting just one 25bp cut this year, in December.

Of course, this will come as bad news to a certain orange man in the Oval Office, particularly after President Trump’s ill-timed call for “interest rates…to be lowered” just half an hour before the CPI figures crossed newswires. Bear in mind, as well, that the data out yesterday makes no account for tariffs that the Administration has already announced, or those which have been mooted, such as a host of reciprocal measures.

Markets, meanwhile, reacted as one would expect to the hot inflation data – stocks slumping, Treasuries selling-off across the curve, and the dollar vaulting higher against all G10 peers. Albeit, with the moves in equities, and the buck, paring as the afternoon progressed.

This reaction, though, again, helps to evidence why a bull case for equities can’t rest on the idea of a looser monetary policy stance, with the ‘Fed put’ of 2024 no longer in place, and the comfort blanket of lower rates a pipe dream, in the short-term at least. Still, I’d be a dip buyer here, as strong economic growth, and solid earnings growth, should be enough to propel the market higher, albeit likely in a bumpy fashion. Friday’s retail sales figures are, naturally, the next key event to have on the radar to ensure this bull case remains valid.

In the FX world, the CPI report reinforces the dollar bull case, which is built not only on a continuation of the ‘US exceptionalism’ narrative, but which is also supported by the FOMC likely maintaining a more hawkish stance than their G10 peers, for a much longer period of time. Lingering trade uncertainty also makes it tough to sit in USD shorts for any length of time, leaving another move up towards the recent 110 highs in the DXY on the cards. Downside seen on the back of reciprocal tariffs being punted for another day provides another dip to be bought.

LOOK AHEAD – Today’s docket is somewhat quieter.

This morning, focus will fall on fourth quarter UK GDP data, which is likely to paint a relatively grim picture of the economic backdrop, with the economy set to have contracted by 0.1% in the final three months of 2024. Data of this ilk would confirm the ‘stagflationary’ outlook facing the UK economy, which continues to provide little if any reason to like GBP-denominated assets.

Elsewhere, the Stateside docket is busy, with last month’s PPI figures, and last week’s initial jobless claims data, both due. Neither of the claims figures, though, coincide with the survey week for the February jobs report. 30-year US supply is also on the slate, with a $25bln auction later on today.

Finally, remarks today are due from ECB policymakers Nagel and Cipollone, while earnings will drop from the likes of John Deere (DE), Airbnb (ABNB) and Palo Alto Networks (PANW).