…but the greenback could make a comeback once the dust settles.
Source: ThinkMarkets and TradingView.com
One of this week’s much-anticipated macro data has just been released. Consumer prices in the US were expected to have jumped 2.5% in March from a year earlier, or 0.5% month-over-month. But the actual data showed CPI rose 2.6% y/y or 0.6% m/m. Core inflation rose to 1.6% y/y from 1.3%, with the month-on-month reading printing 0.3%.
As inflation was only slightly hotter than expected, the dollar, which was rising ahead of the data, eased back down to levels it was trading prior to the publication of data. US index futures recovered from their earlier lows with Nasdaq futures breaking out.
So, it looks like the market was actually relieved that inflation was not as hot as some had feared. But once the dust settles, we may see the dollar come back and yields rise as investors look ahead to the future path of inflation and what that might mean for the dollar.
Inflation will probably pick up further and the numbers for the next few months may appear abnormally large as base effects from the 2020 lockdowns skew the data. The Fed expects inflation to then settle down after a temporary acceleration. However, the key risk is if their assumption turns out to be wrong, and price pressures remain elevated. In fact, with consumers’ inflation expectations rising, this is could translate to actual rise in price levels. According to the Federal Reserve Bank of New York’s monthly Survey of Consumer Expectations, a growing share (44%) of surveyed Americans see the inflation rate rising over 4% in the year ahead, the most since September 2013.
Therefore, there is a possibility that the Fed may want to ease off the gas sooner than expected as the economy potentially heats up faster. They wouldn’t want to overcook inflation and then apply the brakes harshly. So, watch out for a change of tone from Jay Powell and co. in the coming weeks.
Subtle change of tone from Fed Chair
In fact, the Fed Chair Jay Powell said something very interesting yesterday, even though at first it sounded quite a normal thing to say - that it was highly unlikely there would be any rate hikes this
year. Previously, the Fed Chair was implying not to expect a rate hike for at least a couple of or few years. So, there was a subtle change in his tone in that regard. Now Powell is quite bullish on the economy, and if we do now see more signs of the US economy heating up, then there could be a noticeable change in tone from the Fed.
More Fed officials are going to be speaking this week, and more macro data will be coming up as well. So, watch out for bond yields and the US dollar to potentially rise more noticeably in the coming days.
But what about the stock markets?
With bank earnings starting this week, I reckon that volatility in equities will spike sooner or later anyway. But the key question is whether growth optimism will be replaced by inflationary concerns and taper tantrums soon. All it takes is a few people to start selling to get the ball rolling. With all the above macro concerns and talks about corporate tax hikes to pay for the cost of stimulus, things could unravel on Wall Street soon. Keep a close eye on the major indices -- and indeed individual names with the reporting season officially underway now.
US Suspends J&J Vaccine
US index futures fell before the inflation data was released on the back of reports that the US will pause Johnson & Johnson vaccines amid blood clot concerns. The is potentially dealing a blow to efforts to reopen the world’s largest economy, but following the inflation data futures jumped and Nasdaq in particular showed good strength as investors were relieved inflation was not too hot.
Here is what’s in store for the next few days: