Stocks waver as inflation concerns remain and Fed Minutes project a 'mild recession' later this year

• Inflation is cooling but still nowhere near target
• Fed Minutes show policymakers are eyeing a mild recession this year
• Dollar softer as rate cut bets boosted post CPI and Minutes

US stocks initially rallied after the March inflation report showed consumer prices are decelerating, prompting bets that the Fed might be done tightening.  Wall Street wants the Fed to be done with this rate hiking campaign but with supercore inflation nowhere near target, more work needs to be done.

The initial stock market rally was faded as inflation is still too high and as rate cut bets are still aggressively getting priced in. Investors also might not necessarily want to aggressively pile into risky assets before the big banks kickoff earnings season.

CPI

Headline inflation is coming down but Powell’s favorite inflation measure, core services excluding housing, is still elevated, rising 0.4% down from 0.5% in February.  Housing costs were the biggest contributing factor to this inflation report, with food at a distant second place.

The March inflation report showed pricing pressures moderated as the headline consumer price index climbed 5.0% in the year through March, down from 6.0% and a tick lower than the consensus estimate.  On a monthly basis, inflation eased from 0.4% to 0.1%.

This inflation report had a lot of mixed signals.  The food index at home was lower for the first time since September 2020. The energy index plunged 3.6% in March but that is expected to rise given the sharp rise in oil prices.  Housing costs edged lower but are still high and contributing the most to inflation(70% to the net monthly change in the headline CPI).

After the inflation report, Fed’s Barkin said there is more to do to get core inflation down.

Fed Minutes

The old news minutes didn't yield much of reaction except for some softness with the front-end Treasury yields.  There were not surprises as all officials supported the quarter-point rate rise and as several members stressed need for policy flexibility.   Banking turmoil has led to the scaling back of expectation for future rate hikes.

The Minutes noted that, "The staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years."

The dollar kept its losses as rate cuts for later in the year remain firmly intact.