Core price exceeds estimates

The latest U.S Inflation report was unable to give markets the relief that they were so desperately hoping for yesterday afternoon. Expectations were high that there would be a greater moderation, especially in the annual pace of broader inflation, which ‘only’ drifted down from 8.5% to 8.3%, and a monthly gain of 0.3% - slightly above the 0.2% predicted. It was in the ‘core’ component (MoM) where the markets probably felt the greatest disappointment, however, with a 0.6% gain surpassing analyst estimates, which centred around the 0.2% to 0.4% region for the most part. The core reading extracts the volatile food and energy prices.

The devil is in the detail

Whilst that 0.6% monthly gain will no doubt get all of the headlines, and maybe put some heebie-jeebies amongst the Fed, if you strip the report down a bit, all is not as bad as it seems. Much of the gain in the core reading can be attributed to quirks – such as the big jump in air fares, as airlines claw back some of the COVID-related losses, against a suddenly eager-to-travel consumer. New cars also played their part in lifting the survey, as the powers that be decided to change the methodology this month, which resulted in a 1.1% gain in new car prices. That all has the potential to wash through over the coming months.

Housing trends reversal

The Fed may actually also be getting some of what they want to achieve from raising interest rates, in respect to the Housing Market. With a slowdown in new mortgage applications already apparent, there has been a drive toward rental properties, and this has understandably lifted rents, which too reflected in the report.

What about the market reaction?

Markets had been hanging their collective hats on a broader pullback in the report, which could have then taken some of the froth out of the market-implied path for Fed rate hikes, but alas, it was not to be. Therefore, a positive start to the day ended in another sell-off. How many times have we said that over the past few months?

So, the dollar got smashed then?

Actually, no. there was a slight pullback, but the moves were not as pronounced as the headlines might have suggested. Admittedly, the dollar index is just over 104.00 again, but the gains are marginal, so far. EUR/USD slipped back towards the bottom of the 1.0500 -1.0600 range, just slipping below 1.0500 earlier this morning. ECB Head, Christine Lagarde, cemented expectations for an upcoming ECB rate hike in July, after admitting that a rate hike could come just ‘a few weeks’ after the ECB end their bond-buying programme in Q3. That news may have helped the single currency to maintain some composure.

Weaker UK growth

GBP/USD drifted back below 1.2300, having been as high as 1.2400 earlier in the day. Once again, however, the move was within recent ranges. The latest UK GDP figures have just been released this morning, and at 0.8% (QoQ/Q1) missed estimates, which were homing-in around the 1% region. That figure is down from 1.3% previously, and represents the lowest quarterly growth in the UK for a year. The news will give both the UK government and BoE some food for thought.

In the case of the government, they are holding a ‘remote’ Cabinet meeting in Stoke-on-Trent later today, where they are expected to discuss the possibility of introducing extra short-term measures to help cope with the cost of living. They are also expected to consider whether to introduce a windfall tax on energy companies.

USD/JPY slips below 129.50

USD/JPY moved back under 129.50 yesterday, having found the going tough recently after the strong rally over the past few months, driven by that ever-expanding interest rate differential between the U.S and Japan. The technical analysts amongst us suggest that a ‘double top’ may have formed, which could be helping to fuel the profit-taking.

What else is happening today?

Aside from the GDP print, there has been a throng of UK data out already today. Industrial and Manufacturing Production both contracted slightly, missing estimates. The latest Trade Balance also deteriorated more than expected.. The latest U.S PPI inflation data is due out today, as well as Japanese Money Supply figures, in the wee small hours.  The BoC’s Gravelle will be speaking later today too.