The market quickly changed its mind about the CPI report.
The initial reaction was to sell the US dollar but it quickly reversed and now the dollar is higher. The market was pricing in 115 bps of Fed cuts next ahead of the report, then that rose to 120 bps but has since fallen to 110 bps.
The 1 minute chart of AUD/USD highlights the confused reaction:
AUDUSD 1 mins
I think the algos went a bit haywire here but there’s a good chance the market is buying the US dollar ahead of the Fed here because the FOMC and Powell might push back against aggressive cut pricing, particularly for the March meeting, which is close to 50% for a cut. But for the report itself there were three tidbits that are partly worrisome:
- Headline m/m CPI was up 0.1% vs 0.0% expected. That’s small miss but it’s a miss.
- Real weekly earnings were up 0.5% vs 0.1% expected. The Fed doesn’t want to see a wage-price spiral
- Services less rent of shelter +0.6% m/m vs +0.3% prior. That’s a category the Fed is watching closely
Again, I think this is more about pre-Fed positioning but there’s also a 30-year Treasury auction to deal with later today.