“Well that escalated quickly” – Can’t help but think the inflation read is going to be the start of Fed speak versus data battle for direction and flow.
When you look at the stats from last week CPI its pretty sobering read. CPI rose by a astonishingly 0.8% month-on-month to a post-financial crisis high of 4.2% year-on-year smashing estimate of 3.6% year-on-year – the largest monthly gain since 2009.
Core measures also surprised, the ex-food and energy read was 0.9% to 3.0% year-on-year which is the largest monthly gain since 1981 and a full 1% above the FOMC core level of 2%.
It certainly sent a shock through FX, bonds and gold.
Then on the other side of the coin Fed Speak which was again out in force pushing the line that inflation is only transitory. Here are the major Fed Speak notes:
1. Federal Reserve Governor Lael Brainard: sees improvement in the US economy but stated there is much work to be done to achieve goals and the need for patience as risks remain. Highlighted the April jobs report which should serve as a reminder that the recovery will be uneven and difficult to predict. She believes the jump in prices transitory, with inflation expectations remaining very well anchored at 2% – her speech was before the CPI read.
2. Atlanta Fed president Raphael Bostic followed San Francisco Fed president Mary Daly with language like this pretty good place" and stated that it is appropriate for it to remain accommodative. He notes the labour market is still about 8 million workers shy of its pre-pandemic level and needs be absorbed. Like Brainard he too believes inflation is transitory. Where he differs is that if prices rose too much, the Fed may have to act and tighten policy sooner rather than later.
3. Vice Chairman Richard Clarida who did speak post-CPI data held the line with this response: These one-time increases in prices are likely to have only transitory effects on underlying inflation, and I expect inflation to return to — or perhaps run somewhat above — our 2% longer-run goal in 2022 and 2023;, he went further with this the outcome would be entirely consistent with the new framework the Fed adopted in August 2020. He was however concern over the labour market which appears to be more uncertain than the outlook for activity.
4. Governor Christopher Waller pointed to the main argument all have been making to this point in the cycle – ‘[that] several more months of data will be needed before policymakers will be able to judge the economy's progress on the employment and inflation goals.’ He wants to see at least the May and June jobs reports before thinking of tapering. Expects the Fed to maintain its accommodative stance for some time. The biggest take-out talk was that he expects prices to rise over 2% this year and next but to return to goal in 2023 – that is a considerable amount of time.
Interestingly the long/short movement in the USD was large across the week. EUR/USD moved through $1.2150 a full 1.5 cents post the CPI before sliding all the way back to $1.205. The GBP punched through $1.39 to climb all the way to $1.4166 – a fresh two-month high before dropping back to $1.40 post Clardia’s speech. AUD/USD punched through $0.77 to $0.7856 then reversed to $0.772.
A new variable has been found and this push pull will be a driver of trade going forward.