Markets:
- Gold down $27 to $1992
- WTI crude up 86-cents to $77.78
- US 10-year yields up 15 bps to 4.32%
- S&P 500 down 1.4%, Nasdaq -1.8%
- USD leads, AUD lags
The US dollar rose sharply in the wake of the higher-than-expected inflation data in a move that was disproportionately strong response to what was +0.1 pp surprise in month-over-month core and headline CPI. There were signs of a high reading but even with that, the dollar rocketed higher with USD/JPY initially up 100 pips and later adding about 50 more to hit a three-month high of 150.80.
The euro dropped to 1.0700 from 1.0795 but couldn’t get through the figure. In the hours leading up to the report, the dollar was softer in a sign of an underlying bias in the market. However that bias was dead wrong as the numbers came in hot; with that shift perhaps added fuel to the dollar fire.
Fed pricing now pegs just 86 bps in cuts this year, down from 111 at the start of the day. We wait for a heavy dose of Fed talk in the remainder of the week to help interpret it.
One of the reasons that pullbacks were so small in the dollar was that some of the details in the report were hot. Services less rent rose 0.6% and the core reading was higher than any non-pandemic reading in a decade. There were many who pointed to January quirks but the broad thinking is that the Fed will have to stay higher for longer.
Treasury yields broke out of the recent range with US 10s up to 4.33%. The 50% retracement of the Oct-Dec drop is at 4.40%. Eyes will be on a trio of Fed speakers tomorrow, including the dove Goolsbee who is going to have a hard time finding reasons to keep talking about rate cuts.
Aside from CPI, it was a lighter news day but the inflation report certainly gave the market plenty to think about.