Inflation Watch

April 10, 2024

Inflation Watch

  • The US March CPI report will be a key driver of Fed funds rate expectations and USD.
  • The BOC is expected to leave the policy rate at 5.0%. But we see risk of a dovish surprise to the tone of the statement.
  • RBNZ stands pat and sticks to the hawkish script.

USD is directionless near recent lows but continues to hold above its 200-day moving average at 103.82. 10-year Treasury yields are down near 4.35% after reaching a four-month high of 4.46% Monday and the S&P500 is consolidating near its record high. Fed funds future continue to price-in almost three 25bps policy rate cuts this year. We see scope for a reassessment in Fed funds rate expectations in favour of a firmer USD and higher Treasury yields.

Atlanta Fed President Raphael Bostic massaged his hawkish tone. Bostic reiterated overnight his forecast of one interest rate cut later in the year but cautioned he is open to earlier cuts if there were signs of weakening in the labour market or the pace of disinflation resumes. Bostic also warned of the possibility of delaying rate cuts “even further out”.

The US March CPI report is the main event (1:30pm London). The data will help determine whether recent high CPI readings were noise or a sign that progress on inflation is stalling. Headline CPI is expected to rise 0.3% m/m and quicken to 3.4% y/y in March from 3.2% in February. Core CPI is forecast to rise 0.3% m/m and slow to 3.7% y/y in March from 3.8% in February. The projections are in line with the Cleveland Fed’s inflation nowcast model.

Pay particular attention to the so-called super core CPI (core services less housing), a key measure of underlying inflation. In February, super core CPI remained high at 4.3% y/y but the monthly price increase eased to 0.5% from 0.9% in January. A further monthly slowdown in super core CPI would likely raise the Fed’s confidence that inflation is moving sustainably down toward 2%.

The FOMC March meeting minutes are released later today (7:00pm London). The tone of the Minutes is likely to be skewed on the hawkish side because compared to December 2023 more Fed officials expect two or fewer rate increases in 2024.

A few Fed officials speak today but we doubt their comments will generate much financial market volatility. Fed Governor Michelle Bowman discusses Basel capital requirements (1:45pm London). Chicago Fed President Austan Goolsbee and Richmond Fed President Thomas Barkin participate in a panel discussion for the Social Finance Institute (5:45pm London).

CAD is firmer ahead of the Bank of Canada’s (BOC) interest rate decision and updated macro forecasts (2:45pm London). The BOC is expected to leave the overnight rate at 5.0%. The probability of a 25bps cut today is very low at 14% in part because inflation is still close to 3%. However, the risk of a dovish surprise to the tone of the statement is high. Canada’s labour market is rapidly losing steam, progress on inflation is quickening faster than the BOC projected in January, and the business outlook survey remains weak. As such, the BOC could remove current guidance that “it’s too early to loosen the restrictive policy” and/or slash inflation projections. If we’re right, USD/CAD can sustain a break above key resistance at 1.3600.

NZD is outperforming as the RBNZ sticks to the hawkish script. The RBNZ left the policy rate at 5.50% (as widely expected) and reiterated in the Summary Record of Meeting that “interest rates need to remain at a restrictive level for a sustained period.” The RBNZ also pointed out that while “economic growth in New Zealand remains weak…some near-term price pressures remain”. New Zealand’s OIS curve is pricing a first cut in August, with 60bps of total easing this year.

USD/JPY continues to trade firmly a little under its March high of 151.97. There was no new policy information from Bank of Japan (BOJ) Governor Kazuo Ueda during his semi-annual report to parliament. Ueda highlighted the reasons the BOJ exited ultra-loose policy in March and reiterated the need for maintaining accommodative monetary conditions as trend inflation has yet to reach 2%.

Ueda also emphasised the BOJ “won't change monetary policy just to deal directly with FX moves” but cautioned “we might need to change monetary policy if FX moves lead not just to rising import prices, but risk pushing up trend inflation more than expected.” The muted rise in corporate goods prices in Japan suggests the weaker yen is not inflationary. In March, PPI rose 0.2% m/m to be up just 0.8% y/y while import prices fell 0.4% m/m to be up 1.4% y/y. Bottom line: the BOJ tightening process will be very gradual and a headwind for JPY.

NOK is underperforming. Norway’s March CPI data was softer than expected. Headline CPI rose 0.2% m/m (consensus: +0.5%) and slowed to a six-month low of 3.9% y/y from 4.5% in February. CPI-ATE inflation (adjusted for tax changes and excluding energy products) increased 0.2% m/m (consensus: +0.4%) and eased to 4.5% y/y (matching the July 2022 low) from 4.9% in February. The Norges Bank projects the policy rate to stay around 4.50% until Q3 2024 before gradually moving down. But rising disinflationary pressures in Norway raises the risk the Norges Bank starts easing sooner in Q3.

SEK ignored the unexpected pick-up in Sweden economic activity. Sweden’s GDP increased slightly by 0.1% m/m in February (consensus: -0.2%) following a 1.1% rise in January. This suggests the economy will recover quicky from its end-2023 technical recession. However, household spending remains weak and a drag to growth. Household consumption fell in February for a second consecutive month by 0.5%. Money market price-in 60% probability of a 25bps Riksbank policy rate cut in May and 37% odds of a June cut.

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