US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution

Economic

Summary:

Consumer price index excluding food and energy climbed 0.4%.February advance reinforces Fed’s caution in cutting rates.

Underlying US inflation topped forecasts for a second month in February as prices jumped for used cars, air travel and clothes, reinforcing the Federal Reserve’s cautious approach to cutting interest rates.

The so-called core consumer price index, which excludes food and energy costs, increased 0.4% from January, according to government data out Tuesday. From a year ago, it advanced 3.8%.

Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4% from January and 3.2% from a year ago, boosted by gasoline prices, Bureau of Labor Statistics figures showed. US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_1

US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_1

After a brisk January reading, the report adds to evidence that inflation is proving stubborn, which is keeping central bankers wary of easing policy too soon. Chair Jerome Powell suggested last week that he and his colleagues are getting close to the level of confidence they need to start lowering rates, but some officials have expressed they’d like to see a broader pullback in prices first.

Core CPI over the past three months rose an annualized 4.2%, the most since June.

“This will probably be seen as a reason to keep policy on hold a while longer,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “Through the volatility, the downtrend in inflation seems to be leveling off and the Fed would like to see it continue to move lower before easing rates.” US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_2

US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_2

The market reaction was choppy. Traders initially focused on key details that suggested there are some pockets of relief on inflation, before seemingly turning to the robust headline figures. Treasury yields rose, while the S&P 500 opened slightly higher.

Other than the upcoming release of the producer price index, this is the last major inflation report the Fed will see before its meeting next week. With policymakers expected to hold interest rates steady for a fifth straight meeting, economists will be looking for clues as to when the central bank will start lowering borrowing costs.

Traders still saw June as the likely first rate cut, but pulled those bets back somewhat.

What Bloomberg Economics Says...

“Even as February’s core CPI remained hot, it’s somewhat comforting that January’s jump in OER proved to be a one-off, and the trend in shelter remains for disinflation. More troubling is the fact that core goods disinflation appears to have stalled.”

— Anna Wong and Stuart Paul.

Shelter and gasoline contributed over 60% of the overall monthly advance, the BLS said. Prices also picked up for used cars, apparel, motor-vehicle insurance and airfares — which posted the biggest monthly advance since May 2022.Shelter prices, which is the largest category within services, climbed 0.4%, slowing down from a big jump in January. The same was true for owners’ equivalent rent — a subset of the shelter category, which is the largest individual component of the CPI.

The metric — which tracks hypothetical rents paid by homeowners — made headlines in recent weeks after the BLS suggested a methodological adjustment was a large factor behind the robust reading of the January CPI. Rent of primary residence rose 0.5%, the most since October.

Excluding housing and energy, services prices advanced 0.5% from January, stepping down from 0.8% in the prior month, according to Bloomberg calculations. While policymakers have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.

That measure, known as the personal consumption expenditures price index, doesn’t put as much weight on shelter as the CPI does. That’s one reason why the PCE is trending much closer to the Fed’s 2% target. PCE figures for February are due later this month.

Unlike services, a sustained decline in the price of goods over most of the past year has been providing some relief to consumers — but that may be starting to change. So-called core goods prices, which exclude food and energy commodities, rose for the first time since May.

Policymakers have also been hesitant to cut interest rates given the strength of the labor market. A separate report Tuesday showed real earnings continued to rise on an annual basis, extending a months-long streak in which wage growth has modestly outpaced inflation.

Source:Bloomberg

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Commodity

Cryptocurrency

Gold and bitcoin go through the roof

It’s pretty rare to see gold and bitcoin setting new record highs at the same time. Gold is considered the ultimate safe haven asset, while bitcoin is often viewed as one of the riskiest and most speculative plays. When both of them stage an incredible rally, it sends mixed signals about the mood in global markets.

Yet, the catalysts behind each rally are quite different. The only common characteristic is that both gold and bitcoin have benefited from speculation that the Fed is about to slash interest rates. Aside from that, each asset has been driven higher by its own unique forces.

Gold has been turbocharged by direct purchases from central banks, with China leading the charge. Beijing is trying to diversify its reserves away from the US dollar, after the US weaponized the dollar in its sanctions against Russia. China is worried about suffering the same fate in case its relations with America deteriorate. Why Are Gold And Bitcoin Hitting New Records Together?_1

Why Are Gold And Bitcoin Hitting New Records Together?_1

Chinese consumers have gone on a buying spree as well, searching for protection from the crash in the nation’s property and equity markets. This local demand for gold is evident when comparing prices - gold in Shanghai is trading at a significant premium over the same gold in London.

Safe haven flows have been another source of fuel for gold prices. The geopolitical landscape is unstable and some investors might also be buying gold as a hedge against a recession, as economic growth is losing steam in several regions.

What’s behind Bitcoin’s ascent?

In the crypto arena, bitcoin has enjoyed increased interest from institutional investors following the launch of spot ETFs last year. These contracts have granted the ‘big players’ easier and safer exposure to the famous coin.

One signal that bitcoin's ascent is being driven by ‘smart money’ is that smaller alternative coins are nowhere close to their own record highs. Hence, investors are displaying a clear preference for higher quality and less volatile crypto holdings, rather than simply chasing gains. Why Are Gold And Bitcoin Hitting New Records Together?_2

Why Are Gold And Bitcoin Hitting New Records Together?_2

Similarly, gold can still draw support from interest rates falling. Speculation around rate cuts has pushed bond yields lower, which has boosted the yellow metal that pays no yield to hold. But yields are still quite high from a historical perspective, trading near their highest levels in a decade. This suggests gold can still capitalize on yields falling back to more ‘normal’ levels, particularly if the US economy weakens, forcing the Fed to slash interest rates deeper and faster.

As for bitcoin, the outlook still appears positive ahead of the halving event on April 20th, which in previous instances has benefited prices. At the same time, the king of crypto is increasingly entering institutional portfolios as an alternative asset. Even if it makes up only a tiny fraction of such portfolios, those inflows are still significant for a market as small as crypto.

That said, there might be an even stronger bull case for Ethereum, the second biggest cryptocurrency. Ethereum is still 17% below its own record highs, but with spot ETFs on the horizon, it might be only a matter of time until it attracts the same ‘smart money’ flows as bitcoin did recently.

Applications for spot Ethereum ETFs are still pending approval by US regulators, which could be granted later this year.

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Thomas

Stocks

Economic

A tech-fueled whoosh pushed Wall Street higher on Tuesday, which should give Asian markets a good foundation to build on at the open on Wednesday, but spiking U.S. bonds yields on the back of hotter-than-expected U.S. inflation data could limit the upside.

There's nothing on the local economic and policy calendar likely to move the Asian market dial much on Wednesday, with only New Zealand food prices, Indian trade and Indonesia consumer confidence data scheduled for release.

Investor sentiment across Asia seems to be holding up well. The MSCI Asia ex-Japan index rose nearly 1% to a seven-month high on Tuesday, Chinese stocks hit their highest in nearly four months, and the correction in Japan has fizzled out for now.

All that was before the rebound on Wall Street - the S&P 500 rose to a new record close and the Nasdaq gained 1.5%, boosted by a 7% bounce in market darling Nvidia and 12% surge in Oracle.

This was despite a solid rise in U.S. bond yields - the 10-year yield chalked up its biggest increase in three weeks - after consumer inflation figures for February came in slightly hotter than expected.

U.S. equities have not risen often on days when Treasuries have sold off, so it may be premature to read too much into it. But the bullish view would be that it highlights the confidence underpinning the market, the resilience of tech and AI, and the potential upside still to run.

The question for Asian markets is whether these tailwinds offset the headwinds of higher bond yields and stronger dollar.

Improving domestic sentiment helped lift Chinese markets on Tuesday after the country's No.2 property developer China Vanke said the impact of a Moody's ratings downgrade on its financing activities was "controllable".

Successfully tackling the property sector crisis is key to reviving wider economic growth, fighting off deflation, and reversing the torrent of capital outflows. It's a tall order but the 13% rebound in Chinese stocks in the past month points to some degree of optimism.

Bank of Japan Governor Kazuo Ueda, meanwhile, cooled some of the bubbling optimism on Japan's economy on Tuesday, telling lawmakers that the economy was recovering but also showing some signs of weakness.

The slightly bleaker remarks come ahead of the BOJ's policy meeting next week where the board will debate whether the outlook is bright enough to phase out its massive monetary stimulus.

Ueda's remarks helped push the two-year Japanese yield back from its 13-year high, while the yen had its biggest fall in a month. Tech Resilience vs Sticky Bond Yields_2

Here are key developments that could provide more direction to markets on Wednesday:

- New Zealand food prices (February)

- India trade (February)

- Indonesia consumer confidence (February)

Source: Reuters

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Samantha Luan

Economic

Hopes of a Bank of England interest rate cut were boosted yesterday after figures showed UK wage growth slowing and unemployment ticking higher – adding to signs that inflation pressure is easing.

But it contrasted with data showing a surprise increase in inflation in the United States.

Bank of England governor Andrew Bailey warned that despite the apparently ‘benign’ trend of global inflation coming down, the world is ‘a much more uncertain and dangerous place than we have been used to’.

Figures from the Office for National Statistics (ONS) showed unemployment in Britain climbed to 3.9 per cent in the three months to January, up from 3.8 per cent, and wage growth slowed from 6.2 per cent to 6.1 per cent and job vacancies fell to 908,000.

George Buckley, chief European economist at investment bank Nomura, said: ‘As we head through the year, we expect the pressure for the Bank to cut rates to build, with labour market data being a key factor in the decision making.’

Signs that the jobs market is cooling should give the Bank more leeway to reduce rates, delivering relief for millions of borrowers.

That boosted the FTSE 100, which hit its highest level since May last year during yesterday’s session and closed up 1 per cent, or 78.58 points, at 7,747.81.

Traders have been betting a rate cut will not happen until August but see a roughly 50/50 chance it could happen as soon as June.

Pressure on the Bank of England to cut rates has been building amid signs that the bitter medicine of rate rises has been working, with inflation falling from 11 per cent to 4 per cent.

Latest signs of the strain came in figures from the Bank yesterday showing an increase in mortgage arrears to a seven-year high.

In the US, the battle against inflation initially made swifter progress but suffered a setback yesterday as figures showed it rose to 3.2 per cent in February, up from 3.1 per cent in January.

That has scotched hopes that the US Federal Reserve might cut interest rates as soon as next week.

In Britain, the coming week will provide clues about how soon interest rates will come down.

Monthly GDP figures today are expected to show the economy grew by 0.2 per cent in January, adding to signs that Britain is emerging from last year’s recession.

Inflation data next week looks set to reveal that it fell below 4 per cent in February.

Yesterday, Bank governor Andrew Bailey told a central banking event in Italy that inflation was ‘coming down rapidly’.

Source：thisismoney

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Chandan Gupta

Traders' Opinions

Economic

Forex

In recent forex trading, the EUR/USD exchange rate marked its highest level since January last week. However, a lower close on Friday may signal caution for bullish investors, suggesting a potential risk of the recent outperformance losing its momentum.

As of now, the euro-to-dollar price hovers around the 1.0925 level, with recent gains reaching the 1.0982 resistance level, the highest in two months. Technically, the Relative Strength Index (RSI) has retreated after nearing overbought levels at 70, indicating a potential pullback in the upcoming week's trading. Despite any temporary weakness, the broader technical setup remains constructive, with the EUR/USD price situated above the 50-, 100-, and 200-day moving averages. The real cause for concern would be if the pair starts dipping below these key levels, signaling a broader decline.

Turning attention to the economic calendar, key events for EUR/USD this week include the release of US inflation figures for February on Tuesday and US retail sales on Thursday. Market expectations anticipate a 0.4% monthly and 3.1% annual Consumer Price Index (CPI) reading, with the core CPI figure holding importance, projecting a 0.3% monthly and 3.7% annual reading.

Regarding inflation, February expectations indicate a marginal slowdown, suggesting balanced risks against consensus estimates. This could potentially halt the correction in US interest rate cut expectations before the Federal Open Market Committee (FOMC) meeting on March 19-20.

Amid a recent substantial sell-off in the US dollar, an above-consensus reading in the inflation figures could surprise markets and undermine the prevailing narrative of an imminent June rate cut. In such a scenario, a significant reaction in favor of the US dollar might be expected.

Investors are poised to closely monitor any upward surprises in US inflation data, anticipating potential support for the US dollar ahead of the FOMC meeting on March 20. The possibility of a reevaluation of Federal Reserve expectations in response to robust inflation records enhances the appeal of the US dollar.

Looking at US retail sales projections of 0.5% MoM in February, a reading above consensus could trigger a more substantial USD reaction. The US dollar enters the new week bolstered by renewed confidence that the Federal Reserve will cut interest rates in June, with a 25-basis point cut fully priced in after last week's US jobs report signaled a decrease in wage pressures.

Federal Reserve Chairman Jerome Powell emphasized the central bank's cautious approach, stating, "We are waiting to become more confident that inflation is moving sustainably to 2 percent." He added, "When we gain this confidence, and we are not far from it, it will be appropriate to reduce the level of restrictions so as not to push the economy into recession."

Keeping a close eye on broader risk sentiment in the coming days is crucial, as the US dollar's response appears linked to the ongoing improvement in market sentiment. As the currency landscape continues to evolve, traders and investors alike navigate these dynamics, anticipating further cues and developments that could shape the future of these forex interactions. EUR/USD Momentum Halts Preceding Crucial US Data Release_1

EUR/USD Momentum Halts Preceding Crucial US Data Release_1

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Saif

Economic

In a move to address trade imbalances, President Donald Trump has proposed imposing a 10% tariff on imports. He suggests that forthcoming tax reductions could alleviate the impact of these additional tariffs on American households. However, concerns loom regarding the potential hindrance to global trade and increased costs for American families.

Trump's belief in tariffs as a tool to protect domestic industries is well-known. Despite criticisms and fears of negative repercussions, he maintains his stance on the efficacy of tariffs. In a recent interview, the former president reiterated his support for tariffs, underscoring his commitment to protecting American interests.

Criticism is not solely directed at Beijing; Trump has also accused the European Union of exploiting the United States economically, akin to China, albeit with a smile. This rhetoric underscores broader tensions surrounding trade practices and the imbalance of power on the global stage.

It's worth noting that Trump's first term witnessed a tit-for-tat imposition of tariffs between Washington and Beijing, amounting to billions of dollars in trade. This dispute threatened to stifle the global economy and raised concerns about the onset of a trade war between the world's two largest economies.

The proposed tariffs come amidst a complex economic landscape, where protectionist measures clash with the principles of free trade. While tariffs may offer short-term protection for domestic industries, they can also lead to retaliatory measures and increased costs for consumers. Balancing economic interests with broader diplomatic considerations remains a challenge for policymakers.

As discussions unfold, it's essential to weigh the potential benefits and drawbacks of tariff policies. While they may provide a temporary shield for domestic industries, the long-term effects on global trade relations and economic stability must be carefully considered. Ultimately, finding a balance between protectionism and cooperation will be crucial in navigating the complexities of the modern global economy.

In conclusion

The proposed tariffs by President Donald Trump reflect a persistent belief in protectionist measures as a means to safeguard domestic industries and address trade imbalances. Despite criticisms and concerns about potential economic repercussions, Trump remains steadfast in his approach. However, it's evident that the use of tariffs raises broader questions about the effectiveness of such policies in today's interconnected global economy. While tariffs may offer temporary relief for certain sectors, they risk exacerbating tensions and escalating trade conflicts. The path forward requires a delicate balance between protecting national interests and fostering cooperative, multilateral approaches to address the complexities of international trade. Ultimately, the efficacy of tariff policies will hinge on their ability to navigate these challenges while promoting sustainable economic growth and stability on a global scale.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Chandan Gupta

Traders' Opinions

Forex

Amidst recent market maneuvers, the Japanese yen flexes its muscles against the US dollar, fueled by noteworthy economic developments and news highlights. The USD/JPY pair experienced a recent dip, touching a five-week low of 146.48 before stabilizing around 147.00, all while eagerly anticipating the release of critical US inflation figures.

On the economic calendar front, the Japanese Cabinet Office unveiled the GDP figures for December 2023, revealing a growth of 0.4% and successfully avoiding the anticipated technical recession. This unexpected resilience in the Japanese economy confirmed the yen's recent strength against the dollar, exemplified by the pair's descent from 147.07 yen to 146.68 yen following the GDP announcement.

Even before this, the US dollar had been facing a downturn against the yen, hitting a multi-week low of 147.06 yen on a recent Friday. This decline, notably compared to Monday's resistance level of 150.47, marked a significant drop not witnessed since February 1st. Adding to the USD/JPY downward pressure, the Bank of Japan played a notable role, hinting at a potential departure from negative interest rates, a sentiment supported by the earlier GDP data.

As the US dollar ventures into a new week, confidence grows in the possibility of the Federal Reserve implementing a 25-basis point cut in US interest rates come June. This rate cut is now fully priced in for the mentioned month, with last week's jobs report indicating a release of wage pressures. Federal Reserve Chairman Jerome Powell emphasized the need for confidence in sustainable inflation before easing restrictions, reassuring lawmakers of their cautious approach.

In the broader market context, the sentiment surrounding risk is closely monitored, influencing the dollar's response to an evolving positive outlook. Analysts highlight a recent shift towards risk appetite as a significant driver of US dollar behavior, resulting in a weakening trend. Global stock markets on the rise, decreasing volatility across various asset markets, and signs of recovery in global purchasing managers' indices contribute to this shifting narrative.

Moving into the technical analysis and expectations for USD/JPY, recent speculations regarding interest rate hikes, coupled with the strength of Japanese GDP and the yen, suggest a potential decline in the USD/JPY pair. While the recent upward trend of the US dollar may not be completely exhausted, attention is redirected to the Japanese yen, poised to take center stage, at least temporarily.

Investors are on high alert for any bullish surprises stemming from US inflation data, which could lend support to the US dollar ahead of the Federal Open Market Committee (FOMC) meeting on March 20. The possibility of US interest rate markets reassessing Federal Reserve expectations in response to robust inflation figures adds to the intrigue, potentially boosting the appeal of the US dollar.

From a technical standpoint, strategic moves involve buying the US dollar against the Japanese yen at support levels of 145.60 and 144.00, respectively. However, the psychological resistance at 150.00 remains pivotal for maintaining strong bullish control over the USD/JPY pair. As we navigate this intricate dance between currencies, the market eagerly awaits further cues and developments that could shape the trajectory of these dynamic forex interactions. USD/JPY Anticipating US Inflation Data with Cautious Optimism_1