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.
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.
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.
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.
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 with that aside, there were higher price pressures in broader categories that also moved the needle up for core inflation.
So, what can we make of the latest US CPI snapshot? CIBC notes that: "Price pressures were red-hot in the US in April, with the headline CPI rising by a 0.6% m/m pace as expected by the consensus. That reflected another lofty increase in gasoline prices and a pickup in food, which left the annual pace at 3.8%, up from 3.3% in the prior month.
The first signs of passthrough from the oil shock into core elements were on display, with the ex food/energy measure rising by 0.4% m/m (vs 0.3% expected), with airfares up strongly, while some tariff-exposed categories including apparel added to the upside, leaving the annual pace at 2.8%. This data only includes the first signs of broader spillover from the oil price shock into core components, and annual inflation is set to move higher in May, which will leave the Fed on the sidelines until there are signs of oil prices heading sustainably lower." Their call fits with market pricing at the moment, with no rate changes expected until by year-end. Even as oil prices continue to ramp up and we're seeing that seep into inflation pressures, market players are still not all too convinced that the Fed has to pivot towards rate hikes just yet.
As for CIBC's call, it fits with their forecast that the Fed is unlikely to move until either inflation falls firmly towards the 2% threshold or unemployment approaches the 5% mark. This article was written by Justin Low at investinglive.com.
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