As the day comes to an end the CPI data from yesterday is in the market’s rear view mirror. There is no fear.
Chicago Fed President Goolsbee expressed his opinion along those lines. He remarked that even if inflation rates are slightly higher, they still align with the anticipated trajectory towards the Federal Reserve’s target. He also expressed a viewpoint diverging from waiting for inflation to hit a 2% mark on a 12-month basis before considering rate cuts. Instead, he advocates for rate adjustments to be based on the confidence that the economy is moving towards the target inflation rate.
Goolsbee remains optimistic about seeing improvements in housing services inflation (we are still waiting) and is closely monitoring the puzzling CPI data presented yesterday, indicating his proactive stance on economic developments. He described the current policy stance as quite restrictive, suggesting a readiness for adjustment based on incoming data. Furthermore, Goolsbee highlighted the potential support from the supply side for the current year and noted the significant implications of continued higher productivity for policymakers, suggesting a forward-looking approach to managing economic policy.
Former Fed Chair and current Treasury Secretary added her opinion stating that it would be a “tremendous mistake” to focus on minor changes in CPI.
Toward the end of the day Fed Vice Chair said that the FOMC is confident it is on a path to 2% inflation, but he did say the road to 2% may be a bumpy one.
The comments from officials – there was no economic data – has sent yields back to the downside. The 2-year yield fell -7.4 basis points to 4.582%. The 10 year yield fell -5.3 basis points to 4.263%.
The gains yesterday after CPI were still larger but technically speaking, the 10-year yield moved away from its 100 day MA after testing that level yesterday and at the highs today (see blue line on the chart below). Is the high in place?
The US 10 year yield backs off
Lower yields spurred on buying in the US stock market after the one day tumble yesterday. Like the yields, the gains today were less than the declines from yesterday, but it was a pretty solid rebound. The is the index is closing just above the 5000 level. The NASDAQ index was the biggest gainer of the 3 major indices, but could not merge the gains from the small-cap Russell 2000.
The final numbers in the major indices showed:
- Dow industrial average rose 151.52 points or 0.40% at 38424.28
- S&P index rose 47.47 points or 0.96% at 5000.63
- NASDAQ index rose 203.54 points or 1.30% at 15859.14
The small-cap Russell 2000 surged by 47.92 points or 2.44% at 2012.10.
The reversal from yesterday’s moves in the US yields, and in the stocks made a reversal in the USD appropriate as well (the USD was the strongest currency yesterday). Looking at the strongest to the weakest of the major currencies (see ranking below) the greenback is ending the day as the 2nd weakest of the major currencies only surpassed by the GBP. The strongest of the major currencies today was the AUD and the NZD (helped by the risk on flows).
The strongest to the weakest of the major currencies
Helping the GBP move lower was lower than expected inflation released in the European session today. BOEs Bailey did give testimony to the House of Lords today and he was tilted to the dovish side.
Bailey commented that the staff believes that about 70% of the transmission of monetary policy has been achieved. He emphasized that the inflation trends in the upcoming spring would not be the sole determinants of monetary policy adjustments. He expressed skepticism towards forward guidance, suggesting it often remains in place longer than necessary. However, there’s an expectation that inflation will return to the target by spring, emphasizing the goal to sustainably achieve a 2% inflation rate.
He noted that recent inflation data has shown more downward pressure than the BoE anticipated, which he regards as positive news. He said that the data aligns broadly with the BoE’s expectations and does not significantly alter the outlook for the February meeting. He said that there are indications of pay growth deceleration, with the latest wage data presenting a notable reduction, albeit not as significant as expected. The UK’s economic outlook remains uncertain, with a technical recession in the first half of 2023 being a possibility, though there are signs of growth resurgence. Finally, he acknowledged that contributing to a more positive outlook are the lower yield curve and the potential rise in the short-term equilibrium interest rate. As inflation decreases, it’s expected to reduce inflation expectations and impact wage negotiations, a process that is beginning to unfold according to Bailey.
In other markets as the day comes to an end:
- Crude oil fell $1.27 or -1.63% at $76.70
- Gold prices fell $-2.45 or -0.11% at $1990.60
- Silver rose $0.25 or 1.11% at $20.35
- Bitcoin continued its move to the upside. It currently trades at $51592 up 3.70%.