Inflation kicked off higher to start 2023 with January 2023 CPI coming in higher than expected.
The Consumer Price Index (CPI) rose 0.5% in January, translating to an annual gain of 6.4%. The markets expected increases of 0.4% and 6.2%, meaning January’s data came in higher than expected.
If we exclude food and energy prices, core CPI rose 0.4% monthly and 5.6% from a year ago. These numbers are also higher than the estimates of 0.4% and 5.6%.
Stubbornly high inflation? Who would have thought it? Today’s inflation data raises concerns given Fed chair Powell was touting disinflation. With today’s data coming in higher than expected, the markets may now begin pricing in more rate hikes rather than a pause. The Fed looks like it still has some work to do in order to tame inflation.
Currently, the markets expect the Fed over its next two meetings in March and May to raise its overnight borrowing rate another half a percentage point from its current target range of 4.5%-4.75%.
If you break inflation numbers down, shelter costs accounted for half the monthly increase, rising 0.7% on the month and up 7.9% from a year ago. Energy was up 2% and 8.7% while food costs rose 0.5% and 10.1%.
Average hourly earnings fell 0.2% for the month and were down 1.8% from a year ago.
“Inflation is easing but the path to lower inflation will not likely be smooth,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking.”
The next big US economy data point will be retail sales, which will be released this Wednesday morning.
“The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%,” said Maria Vassalou, co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management. “If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation.”
US stock markets initially gained this morning but have given up gains after digesting the CPI data. At time of writing, markets appear to be ready to break below intraday lows.
For regular readers of my Market Moment articles, I have highlighted two charts which have broken out and I did sound the alarm bells saying these breaks are worth noting.
One of those charts was the bond markets. The 2 year yield is continuing its breakout. As this market closely follows the Fed funds rate, markets really would feel the pressure if this market breaks out above 4.75%.
The US Dollar may be ready to turn and start a new uptrend. The criteria I look for in my reversal setups have triggered. We just lack the first higher low which would be confirmed with a close above 103.65.
Currently, the US Dollar is retesting the breakout zone of 102.50. As long as we remain above this zone, the new uptrend remains in play.
If we see continued strength in the US Dollar and a rise in yields, both would put more pressure on the US stock markets.