US CPI inflation and Fed meeting minutes – important events for the markets

European markets started the week well despite the warning MFW extension concerning the broadly understood banking sector and the risk to economic growth in a broader sense. Offering a bleak outlook for the global economy, the IMF pointed to the possibility that interest rates could eventually fall to levels a few months ago, though it declined to give a timeline.

Twilight Zone

With markets currently in a "twilight zone" between Friday's employment report and today's March CPI, the picture regarding the Fed's next rate move may become a bit clearer, even though last week's economic data largely pointed to some deterioration in the US economy.

Friday's employment report reset the narrative of last week's bad data that sent bond yields plummeting to 236 in March. jobs and the unemployment rate fell to 3,5%, even though the labor force participation rate rose to 62,6%.

Last week's figures seem to suggest that people are finally returning to work as the cost of living continues to weigh on consumer finances. The data also suggests that the number of people returning to work will continue to fall, as it fell below 2021 million in February for the first time since May 10. Wage data fell from 4,6% to 4,2%.

The market reaction over the last few days was the return of 2Y US yields above 4% after falling to 3,65% at some point last week.

Friday's employment report also saw an upward revision to 326. in February, with a downward revision to 477. from 504 thousand in January.

All in all, despite some weaknesses seen in last week's ISM data, the US labor market still looks resilient with little sign of weakness at the moment, which casts doubt on the narrative that we will see rate cuts in the second half of this year.

Judging by the reaction of the bond market, Friday's data also support the prospect of another 25 bp rate hike. ahead of today's US CPI data for March, in which core prices are expected to rise to 5,6% from 5,5%. This is what the Fed fears most, especially in services, which continues to grow and is likely to drive policy decisions going forward.

These will be the focus of the central bank, even if today's headline figures are expected to improve - down from 6% to 5,1%.

US PPI data

Tomorrow's March PPI figures could further reinforce the dovish narrative if they continue to fall sharply as they tend to be more forward-looking and act as a leading indicator for the CPI.

While today's CPI data will keep the heat on the likelihood of a pause or further 25bps rate hike in early May, today's Fed minutes may offer useful insight into the discussions at the previous Fed meeting when the US banking system was in significant turmoil due to the collapse of Silicon Valley and Signature Bank.

There has been speculation in some quarters that Federal Reserve could consider lowering rates. In many ways, any notion of a rate cut would be absurd and could make things worse and scare the market even more.

Nevertheless, the confusion meant that the Fed had to be much more careful in its communiqués and despite continued 25 bp rate hike, there was a significant change in tone in the statement. Removing the reference "further increases will be appropriate" to "some additional policy tightening may be appropriate" was a sensible change, giving the Fed room to hold off on a decision at the next meeting, data permitting, and indicating that the end of interest rate hikes may be near.

Today's minutes will also likely be informative as to how seriously the option to hold rates was discussed, and whether going this route may have sent a signal that the Fed is more concerned about the current situation than the markets would like.

Powell admitted that holding off rate hikes was considered due to the banking crisis, but the challenge for the Fed will always be how to present this change without spooking the markets even more.

Powell said the prospect of a rate cut this year was not on the table, which was presented as an option in some circles.

A cursory analysis of the latest dot plot confirmed that Fed officials are not considering a rate cut any time soon, though markets were still stubbornly pricing in such a possibility.

We also have the latest monetary policy decision by the Bank of Canada, which expects to keep rates unchanged at 4,5% for the second month in a row as it continues to assess the effects of previous rate hikes on the Canadian economy.

So far, we've seen recent employment figures hold up well, while the headline CPI continues to fall.