Brooks Macdonald: fall in year-on-year readings of both core and headline CPI enough for markets to breathe a sigh of relief

by | Mar 14, 2023

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Edward Park, Chief Investment Officer at Brooks Macdonald, has commented on today’s US consumer price inflation data.

He said: “Bond markets have seen a gigantic rally in recent days as investors wager that the Federal Reserve will shortly stop raising interest rates as a result of the SVB collapse and associated contagion. While bond pricing has moved, investors ultimately have no idea how the Fed will interpret the SVB news and whether voting members will be willing to pause interest rate hikes when CPI remains well above the target range. Today’s US CPI release shows sticky inflationary pressures, particularly within the core reading which came in slightly higher than market expectations on a month-on-month basis. The robust inflationary outlook sits at odds with the bond market expectation that interest rates will shortly peak in the United States before falling in the second half of the year. 

“There was little good news in the inflation report for investors, however the fall in the year-on-year readings in both core and headline CPI was enough to allow markets to breathe a sigh of relief. Some had feared an even higher inflation number that would have rapidly called into question the more dovish US monetary narrative of the last few days. Investors will need to wait and see how the Fed reacts to the SVB saga and CPI release at their rate setting meeting next week. Should the Fed pause interest rates, and signal upcoming cuts, it would do so at a time of high employment and high inflation, a decision that would be without precedent.”

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