US consumer prices fell to 6% in February as markets were anticipating, the smallest annual gain since September 2021, with the monthly rise falling to 0.4% from 0.5%. But core inflation continues to be a cause of concern as prices excluding food and energy rose 0.5% after rising 0.4% in January, highlighting the shift from goods inflation to services inflation.
US stock indices jumped higher after the data after a few turbulent days from the fallout of the Silicon Valley Bank (SVB) collapse, which has seen the most volatility in us bonds in the last two decades. The drop in CPI has fallen in line with hopes that the US economy is not overheating, something that had become a big concern after the strong economic data in January. Friday’s jobs data also relieved some of the anticipation for next week’s FOMC meeting as the unemployment rate ticked up slightly after falling to the lowest level since 1969 in January.
The collapse of SVB has also served to reprice expectations regarding the FOMC meeting as the chance of a 50bps, which had become a strong probability after Powell’s hawkish comments last week, has been completely priced out, with an 80% chance of 25bps vs 20% c chance of no hike at all. This is because many investors believe the Fed needed something “to break” in order to reassess their monetary policy, and the turmoil in the financial system over the past few days may be just that. In fact, many times we’ve heard Powell reiterate that the rate hikes delivered last year weren’t evident enough to have easy financial conditions, given the extremely tight labour market and stubborn inflation, but the impact than an inverted yield curve is having on smaller banks - which are having to borrow at higher rates than what they lend out in the longer-term - is a clear sign of struggle, and may just be the “breaking point” the Fed has been waiting for, hence the repricing in rate expectations and the significant drop in bond yields.
Whilst the CPI is still three times the Fed’s target, markets have reacted positively to the reading. The Us dollar index trimmed some of its earlier gains and is hovering around yesterday’s lows and the 50-day SMA (103.0637) whilst the S&P 500 is attempting to build higher after three consecutive days of losses which have taken the index below its 200-day SMA (3934) and causing it to dip below its 2022 descending trend line, despite not closing below it, which in itself provided some momentum for the reversal. Gold (XAU/USD), on the other hand, has taken advantage of the fear in markets and its appeal as a recession hedge has been shining through pushing gold to a 5-week high, but today’s data, which has calmed some of those fears, is seeing XAU/USD dip back slightly.