📆 US CPI data scheduled for 1:30 pm BST today will be key for next Fed's decision
Release of the US CPI data for March will likely be a key for the next FOMC rate decision. Should inflation drop significantly and the Fed notes an improvement in services inflation, pause in the rate hike cycle may be on the cards. On the other hand, jobs market remains firm, giving reasons for one more hike. What to expect from today's CPI release>
Why should inflation drop?
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Market expects headline CPI to drop to 5.2% YoY but core CPI to accelerate to 5.6% YoY. If confirmed, it would be the first time when headline CPI drops below core since end-2020
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Drop in inflation can be attributed to base effects - inflation kept climbing a year ago, mostly because of high fuel prices with oil still trading above $100 per barrel back then
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Food prices, especially grain prices, were at extremely high levels while fertilizer prices were the highest in history. Currently, food prices are lower what should support drop in inflation
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Wage growth, according to NFP report, slowed but remains at level inconsistent with 2% inflation
Headline US CPI is expected to drop below core gauge but both measures stay significantly above inflation target. Source: Macrobond, XTB
Why could there be an upside surprise?
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Core inflation is expected to accelerate for the first time since September 2022. Higher labor costs as well as elevated energy prices are still being passed onto final prices
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Car prices halted a steep year-over-year drop and started to increase on month-over-month basis
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Fuel prices on a year-over-year basis are lower but have been recovering since the beginning of 2023. Moreover, WTI found its way above $80 per barrel after recent OPEC+ decision to cut output
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Services inflation continue to accelerate, driven by wage growth
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Costs related to real estate market services are also on the rise
Services inflation excluding shelter is expected to drop going forward but the correlation pictured on the chart above is not as strong as it used to be. Source: Macrobond, XTB
US500
Today's inflation reading is likely to be crucial for the Fed when deciding whether to end the rate hike cycle in May or not. Should inflation surprise with a lower-than-expected reading, US500 may be gearing for a breakout above recent local highs. However, one should keep in mind that other events, like today's FOMC minutes or Wall Street earnings report that begins on Friday, may also have an impact on Wall Street equity indices.
US500 trades near key resistance zone ranging between 50% retracement of the downward move launched last year and a 4,200 pts mark. Volatility is limited and US yields resumed climb, suggesting potential reversal. However, US500 will also be vulnerable to other events in the hours and days to come, like FOMC minutes release or US banking earnings. Source: xStation5
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