Fed still sidelined even as US inflation picks up in April - CIBC
At a Glance
The desk interprets the recent uptick in US inflation data as a signal that the Federal Reserve remains firmly on the sidelines, despite rising price pressures. Per the full note from CIBC, the April CPI rose to 3.8% year-on-year, slightly above the 3.7% consensus, driven by higher energy and shelter costs. This inflationary pressure is not expected to prompt an immediate Fed response, as market expectations currently align with no rate changes until year-end. The desk emphasizes that the Fed is likely to remain inactive until inflation trends closer to its 2% target or unemployment rises significantly, which aligns with CIBC's forecast.
Key Takeaways
- 01April CPI rose to 3.8% y/y, above the 3.7% consensus, indicating rising inflation pressures.
- 02Core inflation also increased, suggesting broader price pressures that may influence Fed policy.
- 03The Fed is expected to remain on hold until inflation trends closer to its 2% target.
- 04Market expectations currently align with no rate changes until year-end.
Full Analysis
What the desk is arguing
The desk frames this as a clear indication that the Fed is not poised to adjust rates in the near term, despite the April CPI showing a notable increase. The core inflation rate, excluding food and energy, also rose by 0.4% month-on-month, indicating broader price pressures that could influence future Fed policy.
The CIBC report highlights that the annual inflation rate climbed from 3.3% to 3.8%, with significant contributions from energy and shelter costs. This suggests that while inflation is rising, it may not be sufficient to compel the Fed to change its stance until more definitive trends emerge.
Where it sits in our coverage
Our consensus target for USD/CAD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns with the broader consensus, particularly with jpmorgan's target sitting at the upper end of the range. This suggests a cautious optimism regarding the dollar's strength amid inflationary pressures.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's perspective, anticipating that the Fed will remain on hold until inflation shows more consistent signs of moderation. Conversely, bofa holds a contrary view, suggesting a more aggressive Fed response could be warranted if inflation continues to rise.
Watch USD/CAD closely as it reflects the interplay between US inflation dynamics and Fed policy expectations. The trajectory of inflation data will be crucial in shaping market sentiment moving forward.
Market Implications
Traders should monitor the USD/CAD pair for potential volatility as inflation data continues to unfold. A sustained increase in inflation could challenge current market expectations of Fed inaction, particularly if it approaches the 4% mark.
From the original
In case you missed it: US April CPI 3.8% y/y vs 3.7% expected It was no surprise that headline inflation got another bump up on the back of higher energy prices. However, core prices were also seen moving up as shelter prices in particular reaccelerated on the month. But even wit
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