Indecisive Market Reaction to US CPI Beat

U.S. DOLLAR/SPX ANALYSIS

U.S. CPI (JAN) – HEADLINE ACT: 6.4%, EST: 6.2%; CORE ACT: 5.6%, EST: 5.5%
Fed guidance to come.

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U.S. INFLATION PRINT A NON-EVENT AHEAD OF THE US OPEN

Inflation for the January period beat estimates on both core and headline prints reflecting the sticky inflationary pressures in the U.S. The initial market reaction seems in complete contrast to the data with the USD on offer while U.S. stocks (SPX) push higher. The 2-year government bond yield is in limbo as markets digest the report. Only time will tell if markets will follow through with this response or not. The U.S session open may well reverse this response and follow the traditional economic reply.

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Looking deeper into the CPI report, energy prices showed a 2% rise while food and services contributed to the upside. A quote from the Bureau of Labor Statistics may be driving the recent contradictory move in market pricing which reads “The all items index increased 6.4 percent for the 12 months ending January; this was the smallest 12- month increase since the period ending October 2021.”

Looking ahead, Fed officials will come into focus likely echoing the Fed’s goal to bring down inflation thus increasing hawkish bets.

US CPI (JAN):

Source: DailyFX economic calendar

Looking at the implied Fed funds futures table below, money markets have driven up the 2023 terminal rate to 5.213% from roughly 5.180% pre-release.

IMPLIED FED FUNDS FUTURES: