CPI week in the US starts off on a mixed note with lower US equity futures, unchanged treasuries, and a slightly weaker USD. Tomorrow’s inflation data will be the last major economic release ahead of next week’s Fed rate decision.  

While it is not the preferred inflation metric of the Fed, the Consumer Price Index (CPI) is most certainly a bellwether for it given the market volatility that occurs after every release. The previous report caused the USD to surge almost 1% against a basket of currencies measured by the Bloomberg Dollar Index (BBDXY), after all CPI metrics came in hotter than expected. In fact, risk sold off in general with the S&P 500 stock index dropping almost 2% prior to recovering a few days later. The rationale for these moves has been, and continues to be, that stubbornly high inflation above the Fed’s 2% target rate will result in “higher-for-longer" rate policy that will strengthen the dollar, weigh on equities, and reduce economic growth. In typical “buy the rumour, sell the fact” fashion, quite the opposite has occurred. 

Over the last several months, if not longer, there has been a consistent push-pull in markets where growing sentiment that the Fed is finally close to a cut is followed by disappointment that the can gets kicked down the road. This cycle seems to have occurred so many times that it is hard to keep count, yet the outcome has been the same each time: risk ultimately rallies with new all-time highs in equities and a weakening of the USD. Indeed, the BBDXY is now almost 4% lower from last October’s highs and only 1.5% above December’s lows yet a June Fed cut is yet to be priced in at 100%. So, while financial talking heads on social and legacy media regularly imply that high interest rates are bad for risk the reality has proven otherwise. In fact, it seems like the fear of “higher for longer” should really be the fear of “lower much sooner” as that would imply economic weakness that would force the Fed’s supportive hand, which has historically been too late.  

If recent patterns hold up, a weaker-than-expected CPI tomorrow will lead to an immediate rally in risk (higher equities, softer USD). However, such data would match weakness in last week’s US jobs numbers where the strength of 75,000 more jobs than expected was offset by a 167,000 downward revision across the prior 2 releases as well as an uptick in unemployment to 3.9%. Even ahead of this data, in testimony to both houses of congress last week Fed chair Powell said the Fed “isn’t far from feeling confident enough to cut rates.” The ECB also managed to get in on the dovishness with President Lagarde implying that they may start reducing rates as early as June.  

This leads to the question: have the market’s fears have been misplaced all along? An accommodative stance by the Fed and its peers may be more of a sign of troubled waters ahead than a green light to the continuation of recent irrational exuberance.  

Additional thematic highlights as well as this week’s event calendar:    

Bitcoin reached all-time highs breaking through the $72,000 level 

President Biden signed a $460 billion budget into law to keep the government open through September 

Former President Trump, on an interview with CNBC this morning, said he would levy tariffs against China, the European Union, and others if re-elected 

Event Calendar:   

Tuesday: US CPI; Germany CPI; France CPI; Brazil IBGE Inflation; Mexico Industrial Production; ECB’s Holzmann speaks 

Wednesday: Eurozone Industrial Production; ECB’s Stournaras speaks 

Thursday: US Retail Sales, PPI, Weekly Jobless Claims; Spain CPI 

Friday: US University of Michigan Indices, Industrial Production; Canada Housing Starts; Bank of England Inflation Survey 

EUR/USD is slightly lower on the day but still 0.75% higher than this time last week after last week’s ECB meeting and slightly dovish tone from Christine Lagarde failed to offset USD weakness following the Non-Farm Payrolls data. The economic highlights this week are primarily French, German, and Spanish CPIs. 

USD/CAD is slightly higher on the day but still lower by 0.45% compared to this time last week. The pair is still depressed following the combination of slightly hawkish comments from the Bank of Canada rate decision last week as well as supporting strong jobs print 2 days later.  

GBP/USD is lower on the day but still enjoying a strong run versus this time last week, a move higher of 1.25%. The highlights of the week include a speech by Bank of England policymaker Mann today, industrial production on Wednesday, and an inflation survey on Friday.