U.S. Consumer Price data released today for January was higher than forecast in all categories. Consumer prices increased 3.1% from a year ago, above the 2.9% forecast but lower than December’s Y/Y reading at 3.4%. Core CPI (excludes food and energy) increased 3.9% compared to a year ago, above the 3.7% estimate and matching last month’s 3.9%. Monthly consumer prices increased 0.3% December to January, above the 0.2% forecast. And core M/M CPI increased 0.4%, higher than both the 0.3% estimate and previous 0.3%.
Steady inflation is one thing but rising inflation clashes with the Fed’s recent shift in its rate stance, having replaced ‘tightening’ with ‘any adjustments’ in its rate policy statement on Jan 31st. In the face of higher inflation, the data-dependent Fed will have to push back any speculation of near-term cuts for at least another month, and at least partially revives the rate hike dialogue.
The dollar is sharply higher following the CPI data (higher rates for longer is an incentive to hold USD), lifting the U.S. Dollar Index to 104.87, a 0.58% daily gain and its highest mark since Nov 14th. Resistance at 105.00 is now within easy reach. The dollar is higher against all G10/majors and testing significant resistance in several currency pairs. EUR/USD broke below 1.0750, bringing a 1.0675/1.0700 range into view. USD/JPY broke above 150.00, now up 0.74% today and closer to November’s historic high at 151.92.
U.S. Treasury yields are sharply higher, the biggest gains in the 3yr-10yr tenors. The 3-year tenor leads all gains +0.127%. The benchmark 10yr tenor is now trading at 4.275% compared to yesterday’s 4.18% close. The year-end implied target rate is now 4.366% after reaching 3.65% as recently as Jan 12th.
Prolonged elevated borrowing rates are a headwind to corporate earnings leading to today’s sharp decline in equities. The major U.S. equity indexes are all lower by at least 1%, the Nasdaq leading with a 1.7% decline. Gold is -1.21% at $1,995/oz and silver is -2.63% at $22.09oz.
