A hot inflation release has Wall Street bracing for a half-point Fed rate hike in March, with a full percentage point of hikes by July. Everything got more expensive in January and fears remain that it will get worst. US stocks initially tumbled after surging prices made swap markets add another Fed rate hike, bringing the total to six Fed rate increases this year. Technology stocks suffered the biggest blow as underlying inflationary pressures remain strong and support expectations for hotter reports over the next month or two. The US consumer is clearly weakening here as rents, electricity, energy, and food prices continue to trend higher.
The Fed will be tested here as they were hoping to have a gradual tightening cycle and not a mad dash that looks like a policy mistake. With core inflation well above the Fed’s target and real average hourly earnings declining, the political pressure will also grow on the Biden administration and Democrats. November is still far away, but this inflation report is showing price increases are everywhere and resistance is growing for more fiscal packages that will fuel further pricing pressures.
US stocks recovered most of the inflation-driven losses as investors anticipate that pricing pressures could be peaking just before the Fed’s March policy meeting. Two of the biggest inflationary pressures have been surging shelter prices and new vehicles, both of which seem poised to be improving next quarter. The housing market will undoubtedly peak now that mortgage rates have skyrocketed to 3.69%, the highest level since January 2020. New car pricing was unchanged in January and that could be a sign that manufacturers are finally getting their semiconductor chips.
US CPI hits 40-year high
US inflation jumped to a new four-decade high on robust demand and as supply chain issues persist. The consumer price index came in hotter-than-expected on both a monthly and annual rate. The 7.5% increase from a year earlier, was towards the upper boundaries of the 7.0% to 7.6% consensus range. On a monthly basis, inflation rose 0.6%, which was the same pace in December.
The one positive is that the cost for new vehicles was flat, snapping a streak of several 1% gains. The chip shortage problem may be improving a little faster than we have thought.
The dollar initially rallied as risk aversion ran wild after a hot inflation report have many on Wall Street worried about the strength of the US consumer. Currency traders expecting the dollar to continue to have gains as more Fed rate hikes get priced in might be disappointed as the other advanced economies are not too far behind. Commodity currencies and the British pound turned positive after FX markets digested the inflation report.
Bitcoin prices are holding up nicely given the surge in global bond yields. Bitcoin’s best environment going forward is risk appetite and that might prove to be difficult until we get past the first couple of rate hikes by the Fed. Bitcoin’s institutional investors are focused on Treasuries as that momentum trade appears to be rather straightforward. Bitcoin seems poised to consolidate between the USD 40,000 and USD 50,000 level over the short-term.
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