The only certainty across the pond is the extortionate cost of a US Uber!
Key points
- The March US CPI report marked the third consecutive month of stronger-than-expected data.
- It’s difficult to sustain a narrative that inflation is headed back towards the Fed 2% target.
- The reality in the data is that there is no evidence that the US economy needs to lower rates any time soon.
- The US and European economies are on very different trajectories, and this week’s ECB meeting teed up a prospective rate cut in June.
- As consensus thinking is challenged, the future can appear more uncertain, bringing volatility.
US yields lurched higher in the wake of this week’s stronger-than-expected US CPI report. The March data marked the third consecutive 0.4% monthly rise in succession for core prices, and consequently it seems difficult to sustain a narrative that inflation is headed back towards the Fed 2% target any time soon. With oil prices also moving higher, this means that headline CPI will exceed core data later this summer.
In this context, it is possible that headline prices will record a 5% annual gain, and so it is not at all surprising that hopes for Fed rate cuts are being beaten into a hasty retreat. In many ways it has been notable how solid the consensus around imminent rate cuts has been during the past several months, and it has felt pretty contrarian to be a voice pushing back against this.
However, the reality in the data is that there is no evidence that the US economy needs to lower rates any time soon and, generally speaking, financial conditions appear more accommodative than restrictive, at the current point in time.