The US core inflation has not been this high since 1982. This suggests there will be no letup in the Fed’s hawkish rhetoric and, consequently, markets are still searching for the terminal rate of this Fed hiking cycle. Those trying to pick a top in the cycle are continuing to be swept away. From pricing the Fed terminal rate at 4.45% barely two weeks ago, 23 March Fed fund futures now price the top near 4.90%.
The poor inflation print saw some immediate bearish flattening of the US 2-10 year Treasury curve (US two-year Treasury yields are now 4.45% having started the year at 0.75%) and a broadly stronger dollar – yet the dollar rally quickly reversed as equities turned sharply higher. Presumably, positioning had something to do with this, where buy-side surveys show investors have: a) the most underweight equities ever and b) the most overweight cash (6%) since October 2001. More than $260bn has left equity mutual funds this year and we can only guess that some investors used the CPI event risk as an opportunity to feed money back into equities.
Yet the core narrative remains that the Fed will want higher real rates for longer to fight the biggest inflation threat since the early 1980s, and the dollar should continue to find good support on dips. 111.50/112.00 may be enough of a correction for DXY and some decent US data later today may be enough to give the dollar a lift. We have September US retail sales and consumer confidence. James Knightley thinks that retail sales could come in on the strong side given good car sales data and lower gasoline prices. It was also interesting to see JP Morgan chief executive Jamie Dimon say that he felt that US consumer spending could hold up for nine more months, given high savings and low debt levels – sentiments echoed in the recent FOMC minutes. On the subject of US banks, today sees third-quarter earnings releases from JPM, Citi, Wells Fargo and Morgan Stanley. We’re no equity strategists, but it seems hard to expect a sustainable equity rally from here given what the Fed is planning to do with real rates.