US CPI rises just 0.1% m/m; core up 0.4% - strong enough to maintain expectations for another likely Fed hike next month. US Treasury yields fall post CPI but then reverses much of that price action

The USD has sustained a broad move lower after slightly weaker than expected US CPI data. Core inflation remained too high for comfort, keeping the market on guard for another Fed rate hike early next month. Initial large falls in US Treasury yields were faded, and yields are down slightly on the day, led by the front-end. The NZD is back trading on a 0.62 handle, but has continued to weaken against the AUD and EUR.

Market attention has been focused on the US CPI report. Headline CPI rose by just 0.1% m/m, slightly less than expected, taking the annual increase down to 5.0%. its lowest rate in nearly two years. The CPI ex food and energy rose by 0.4% m/m, as expected, seeing the annual increase tick up slightly to 5.6%. Within the mix there were hints of slowing services sector inflation, with housing cost measures running at the slowest pace in about a year.  The rents measure rose 0.5% m/m, and the core services ex energy component rose 0.4% m/m. But inflation likely remains too sticky for comfort and the Fed wants to see a string of better inflation data before declaring victory. This kept pricing for a Fed hike early next month around +18bps.

There has been a number of Fed speakers over the past 24 hours. Daly‘s comments were dovish, in line with Goolsbee who we reported on yesterday. She noted “…good reasons to think that policy may have to tighten more…but there are also good reasons to think that the economy continues to slow, even without additional policy adjustments. So, we know of at least two FOMC members who will be questioning whether to follow through with a May hike. But Barkin likely sits with the majority, who spoke after the CPI report, and noted that core inflation was still too high and “there’s still more to so I think to get core inflation back down to where we’d like it to be”, although he stopped short of whether he would support a May rate hike.

US Treasury yields fell sharply after the CPI report but the move wasn’t sustained. The 2-year rate fell nearly 20bps to 3.87%, but has since climbed back up to 3.96%. The 10-year rate returned to its pre-CPI level after dropping to as low as 3.34%. It currently sits at 3.41%, down 1bp for the day. US equities have spent most of the day in positive territory, but the S&P500 currently shows a small fall.

The minutes of the FOMC’s March meeting were not market moving.  They showed many participants had lowered their Fed Funds target range projections reflecting the likely economic effects of recent banking sector developments, and several participants stressed the need to retain flexibility and optionality in determining the appropriate stance of policy. Discussion noted risks to inflation in both directions, with resilient labour demand pushing prices higher, but a credit crunch having potential to slow inflation. Fed staff forecasts projected a mild recession starting later in 2023.

The Bank of Canada left its policy rate unchanged at 4.5% for the second straight meeting and maintained a slight tightening bias, viz “Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed”.

The USD broadly fell after the CPI release and has sustained the move, seeing the key dollar indices down 0.5-0.7% for the day. The EUR traded at 1.10 and sits just below that mark, while GBP is approaching 1.25. After spending most of yesterday hovering just below 0.62, the NZD has broken above that level, but not by much, trading at 0.6215 this morning.  AUD has recovered to around 0.67 and NZD/AUD has pushed lower for the third successive day, to 0.9280. NZD/EUR has fallen to a fresh 2½ year low around 0.5650.

CAD has shown the smallest gain against the USD, despite higher oil prices, perhaps reflecting the Bank of Canada not ramping up any hawkish rhetoric following recent strength in employment and GDP data. USD/CAD is down modestly to 1.3440 against a 2% lift in Brent crude, which sees it above USD87 for the first time since January.

Yesterday, NZ card transactions data showed a strong 3.1% bounce-back in March.  With meth detected in the air in downtown Auckland for the first time, one might say consumers were on a high. But the jump followed the 1.7% contraction in February – recent volatility accentuated by significant weather events.  Still, the 1.7% q/q increase for Q1 may not represent much of a real increase, after accounting for strong inflation over the quarter.

NZ swap rates were dragged down yesterday with receivers still in command, pushing rates down 1-2bps across much of the curve.  NZGBs cheapened relative to swap, following offshore markets and ahead of today’s bond tender. The 10-year NZGB rose 4bps to 4.01%. The LGFA’s syndication of a 2030 “sustainable financing” bond met very strong demand, with $1.1b issued at the tight end of the margin range, with an order book in excess of $1.6b.

In the day ahead, Australian employment data are expected to show ongoing tightness in the labour market, with the consensus picking a 20k lift in jobs and the unemployment rate ticking up slightly to 3.6%. Tonight, US jobless claims will be watched for further signs of upward drift while PPI data should have less market impact, coming after the CPI release.