The highlight of the economic calendar comes at the start of the week with US CPI due Thursday at 8:30 a.m. ET. This is a simple economic indicator, but it also presents a philosophical problem for the FOMC.
The overall figures should show a nice improvement with an annual forecast of 2.9% compared to 3.4% in December while a significant figure of +0.5% m/m from January 2023 arrives. Estimates vary between 2.7% and 3.3%. The m/m figure this time is forecast at +0.2%.
It is likely, however, that the market will focus on core CPI, which is expected to slow to 3.7% year-on-year from 3.9% with a reading of +0.3% m/m.
I would say there is an upward bias on the headline and fundamental numbers of +0.1 pp and you can see this in the economists’ estimates with only a slight majority for the lower numbers.
Does a 0.1 pp beat important for the market? It could. U.S. 10-year bonds are near this year’s high yield and may just need a boost. The market is also struggling to find reasons to sell the US dollar.
Zooming out, what we could really use is a sense of the Fed’s philosophical position. The economy is strong but inflation is also falling sharply. The Fed doesn’t do it need to reduce rates because employment is strong, but it is not necessary for them to remain high either. So where is the balance ? And when does this journey begin?
Currently, the market believes there is a 71% chance that the first decline will occur on May 1, but this could easily extend into June. My hunch is that they won’t wait beyond that date unless there are signs of accelerating inflation.
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