Hot CPI print - Wall Street inflation fears mount as break-even rates hit multiyear highs
At a Glance
Lead — The desk is increasingly concerned about rising inflation expectations following a hotter-than-expected CPI print, which has driven five-year break-even rates to their highest levels since October 2022. Per the full note source, the 10-year break-even rate also reached 2.5%, indicating a market expectation of average annual inflation around 2.7% over the next five years. This shift in inflation sentiment is likely to pressure the Federal Reserve towards rate hikes, which could negatively impact risk assets. With oil prices surging approximately 78% year-to-date, the implications for both equities and fixed income markets are significant.
Key Takeaways
- 01Five-year break-even rates have reached their highest levels since October 2022.
- 02The 10-year break-even rate is now at 2.5%, indicating heightened inflation expectations.
- 03Rising oil prices are a significant driver of inflation sentiment in the market.
- 04The Fed may be pressured to raise rates if inflation expectations continue to climb.
Full Analysis
What the desk is arguing
The desk argues that the recent CPI data has intensified inflation fears on Wall Street, as evidenced by the spike in break-even rates. The five-year break-even rate recently hit 2.7%, while the 10-year measure reached 2.5%, its peak for 2023, suggesting that markets are pricing in a more persistent inflationary environment driven by rising energy costs.
This inflationary backdrop is compounded by the ongoing geopolitical tensions, particularly the US-Iran conflict, which has contributed to a 4.2% rise in oil prices on Tuesday alone. The implications are clear: if inflation expectations continue to rise, the Fed may be compelled to increase interest rates, which would create headwinds for equities and other risk assets.
Where it sits in our coverage
Our consensus target for the USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with the broader consensus, particularly with jpmorgan and citi forecasting higher levels, while bofa remains more cautious at the lower end of the range.
How other firms see it
Firms aligned with our view include jpmorgan and citi, both anticipating upward pressure on the USD due to rising inflation expectations. Conversely, bofa takes a more conservative stance, suggesting that the current inflationary pressures may be temporary.
Watch the USD/JPY trajectory as it reflects the Fed's potential rate path, which could be influenced by these inflation dynamics. Additionally, monitor the EUR/USD as it may respond to shifts in European Central Bank policy in relation to US inflation trends.
Market Implications
Traders should closely monitor the 10-year Treasury yield, which has reached 4.462%, as this level could signal further tightening from the Fed. Additionally, watch for any shifts in equity markets, particularly within technology stocks, which may react negatively to rising inflation expectations.
From the original
Wall Street inflation anxiety deepened after Tuesday's hot CPI print, with five-year break-even rates at their highest since October 2022 and the 10-year measure at 2.5%, its peak since 2023. I posted earlier on this here: Hot US inflation print fans fears of Fed rate hike as ene
Related speeches
4 itemsIs US inflation picking up?
Fed still sidelined even as US inflation picks up in April - CIBC
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.
FX Daily: Impact of US CPI mostly depends on equities
The desk anticipates a stronger-than-expected US CPI reading, forecasting a 0.9% month-on-month increase in the headline figure, which could reinforce the hawkish sentiment surrounding the USD curve. This expectation is underpinned by the belief that even a moderate core CPI rise of 0.3% month-on-month will not deter bullish dollar momentum, particularly as geopolitical tensions, such as stalled US-Iran negotiations, may weigh on equity markets. Per the full note [source], the interplay between these economic indicators and equity performance will be crucial for dollar strength moving forward.
FX Daily: Impact of US CPI mostly depends on equities
The current analysis from the desk emphasizes the interplay between US CPI figures and equity market performance, asserting that the strength of the impact will significantly hinge on equity reactions post-release. Per the full note from ING Economics, expectations surrounding CPI are leading traders to closely monitor stock markets for directional cues. Given the elevated volatility observed recently in equities and the upcoming CPI report, traders should brace for potential shifts in currency valuations. The focus remains squarely on how equities react, which may set the tone for broader FX movements.
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