What a difference a (CPI) Day makes

We often talk about, ‘one piece of data does not make a trend,’ that ‘a headline is just a headline’ and that ‘assumptions are not facts.’

We feel this timeless market lesson has been slightly forgotten of late and the latest US CPI data may be case-in-point judging by the market’s reaction to the read.

Let have a dive into the data and the reactions.

Here are the headline grabs:

• The headline Consumer Price Index (CPI) rose by 0.3% from March, slightly below the forecasted 0.4% (good news), and increased by 3.4% year-on-year, in line with expectations.
• Core inflation, (ex-volatiles like food and energy), also rose by 0.3% month on month and 3.6% year-on-year matching predictions. However, this is the main take away April was the lowest core inflation reading since April 2021 and the smallest monthly increase since December.

But like I said – headlines are just headlines what’s the detail saying?

CPI gains were primarily driven by rises in shelter and energy costs.

• Shelter costs increased by 0.4% from March and 5.5% year-over-year, remaining a significant concern for the Fed’s inflation targets.
• Rent of primary residence and owners’ equivalent rent, both rose by 0.4% month-on-month, with annual increases of 5.4% and 5.8%, respectively, highlighting persistent inflationary pressures in housing and why housing is a massive issue inside the ‘sticky’ inflation metric.
• Energy prices rose by 1.1% monthly and 2.6% annually, while food prices remained flat month-over-month but rose 2.2% annually.
• Vehicle prices declined, with used cars falling 1.4% and new cars dropping 0.4%.
• Other notable monthly increases were seen in apparel (1.2%), transportation services (0.9%), and medical care services (0.4%).
• Transportation services saw a significant annual increase of 11.2%, while services excluding energy rose by 0.4% monthly and 3% annually.

These inflation dynamics have us questioning the reactions that were seen as clearly the granular data in areas of issue like shelter, energy and services remain nearly 3 time higher than the Fed’s 2% target.

Yet you wouldn’t know it. The reaction from the three main US bourses was to reach record all time highs. The US500 for the first time ever broke through 5,300 points and the Dow is now inches from 40,000 points.

Rate futures price spiked, with the September meeting expectation gauge going from a 61.4% chance of a rate cuts by the Federal Reserve to 75.3%. The November meeting is now fully priced in and the chance of a second cut in December is above 69%.

Again, I am asking the question based on the trends and longer-term data – is that likely?

The trend has CPI year-on-year slowing to an average 3.6% – 1.6% away from target. Sticky inflation is sitting at a 5% rolling average that’s 3% away from target.

The reaction in treasuries hit FX particularly USD pairs.

DXY was slammed falling 0.4% to 104.52 as the likes of the beaten-up EUR, GBP and other European currencies bounced back against the greenback. These pair are tricky currently as all are facing rate cuts in the coming months – the question will be who goes first and then by how much to they cut over the new cycle? That will be the dilemma for traders as the more cuts the bigger the weaken.

Then we have to look at the AUD/USD which jumped to its highest read since January 15 touching $0.6702 off the back of the CPI.

Since the mid-April low the pair has rallied almost a full 4 cents and with the RBA in a scenario of wait and see. The pressure to the upside remains in the AUD and cold lock the AUD into being the strongest currency in the G10 in the come months. It’s a pair to watch for sure.