The March CPI figures sent stocks and bond yields in opposite directions, with financial markets now coming to the realisation that the wait for interest rate relief looks set to be extended. With headline and core CPI both coming in at the hotter end of the scale, it is doubtful that the Fed will be in any rush to cut rates whilst the direction of inflation remains uncooperative.
Investors began the year with high hopes of a March rate cut from the Fed. Though in the intervening months, March rate cut hopes shifted to June and now June hopes have been kicked down the road to September. And with inflation proving to being difficult to tame, even a September rate cut could be questionable.
Risk assets slid on prospects of a delayed rate cutting timeline, with equity markets taking a hit. The USD and bond yields were among the main beneficiaries of the higher inflation print, with the greenback looking set to enjoy its yield advantage for a longer timeframe whilst inflation continues to show a reluctance to move back below the 3% level. The CPI didn't to any favours for the beleaguered yen, with Japanese officials perhaps sitting closer to the edge of their seats regarding potential intervention.
We saw a mild easing in the gold price in the face of the stronger inflation data. However, buyers have been waiting on the sidelines looking for better entry points which has so far produced shallow pullbacks in the precious metal. This combined with ongoing central bank buying has enabled the gold price to sustain its momentum despite the changing interest rate outlook.
Elsewhere, tensions between Iran and Israel are not showing signs of letting up and the oil price moved higher accordingly. Energy prices are getting a boost from the supply side on disruption concerns, whilst encouraging looking economic indicators around the globe are helping the demand outlook. Traders will be keeping a close eye out for Chinese inflation figures to gauge how the consumer economy is faring.
Still to come this week is PPI data and if this mirrors a similar upward move to CPI, then risk assets could be in for another round of volatility. Financial ,markets remain ultra-sensitive to the interest rate picture and inflation readings, and if further signs emerge that rate cuts are not on the immediate horizon this could spark some further volatility in global markets.
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