Headline inflation hits 40-year highs, recession chatter echoes throughout markets
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Headline CPI data surpassed its 40-year high in March but slowing core inflation provided investors with a glimmer of optimism. Markets are closely monitoring Fed movements as Chairman Powell attempts to navigate a difficult balancing act of cooling off alarmingly high price pressures while limiting collateral damage to the economy. On the FX side, U.S. Dollar strengthened as aggressive Fed tightening in May is now all but expected and the Euro hit two-year lows as the European Central Bank left rates unchanged.
Investors weigh inflation data and recession risks
The Department of Labor released its highly anticipated March inflation data last week, which came in even hotter than investors anticipated. Year-over-year non-seasonally adjusted Headline CPI jumped to a scorching 8.54%, representing a 40-year high and levels not seen since the earliest days of the Reagan administration. The figure represents a significant uptick from 7.87% the previous month and is slightly higher than the already-elevated estimated of 8.4%.
Core CPI, which excludes food and energy prices, increased to 6.5% but rose just 0.3% from the prior month, 20bps shy of the 0.5% month-over-month consensus. Federal Reserve Governor Brainard “welcomed” the news, highlighting that the slowing core CPI data may mean historic price pressures may see “moderation in the months ahead.” While the U.S. 10Y temporarily fell on the favorable news, yields seesawed near their three-year high of 2.83% as investors adjusted their portfolios to price in the higher possibility of a 50bp rate hike in May. Markets will continue to closely monitor future data to determine whether inflation is indeed peaking or if the temporary slowdown in core inflation will prove short-lived.
All eyes will continue to focus squarely on the Federal Reserve as the body looks to balance its efforts of cooling down alarmingly high inflation levels while limiting collateral damage to the economy, wherever possible. Whispers and fears of a possible recession grew this past week as experts are increasingly pessimistic that the Fed will successfully execute a “soft landing” for the economy and quell inflation without drastically slowing growth.
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U.S. dollar bolstered by hawkish Fed plans, Euro hits two-year low
U.S. dollar continued to appreciate last week as DXY rose above 100.5 for the first time since May 2020. Global investors are betting on aggressive near-term tightening by the Federal Reserve and a global flight to U.S. assets as the Fed is expected to pursue a 50bp rate hike next month and a monthly reduction of its balance sheet by $95 billion.
Across the Atlantic, the Euro fell below its two-year low of $1.08. Markets have cast doubts on Europe’s near-term growth outlook and have shown signs of concern, due in large part to the escalating war in Ukraine, rising commodity prices, and the presidential runoff election in France. The ECB announced Thursday, in a move that was all but expected, that it would keep rates constant for now. As a departure from the Fed, any reduction of the ECB’s asset purchase program will likely not begin until its rate hiking cycle starts in Q3.
(Related insight: Read, "7 ways to maximize FX and commodity hedging impact while minimizing costs")
The week ahead
Global markets will closely monitor election results out of Paris as French voters head to the polls on April 24 to vote in the presidential run-off between incumbent Emmanuel Macron and challenger Marine Le Pen. On the data side, the Fed will release its latest Beige Book on Wednesday, initial jobless claims and leading economic indicators will be announced Thursday, and Manufacturing and Services PMI are expected Friday.
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