The market is increasingly admitting its mistake

Yesterday's inflation report from the US was higher than expected and caused some market reshuffles. Stock indices lost significantly, the dollar gained again and the yields of American bonds increased. It was under pressure gold, which is currently below the psychological barrier of USD 2000.

The March rate cut in the US was no longer taken into account at all. May is also questionable in this respect. Investors are also not so sure about the June start date of easing monetary conditions. The market is increasingly adjusting its expectations, which have gone way too far in recent weeks.

Clear inflation stagnation

Inflation in the US surprised on the upside in January. Consumer prices increased by 0,3%. compared to December, those excluding energy and food by as much as 0,4%. The year-on-year rate dropped from 3,4 percent to 3,1 percent, although in this case a discount of 2,9 percent was expected. The base measure remained at 3,9 percent. In particular, services have become more expensive. The "supercore" index, which excludes energy, food and housing prices, increased to 4,3%. y/y. In the previous two months, the dynamics was 3,9%. Strong inflation stagnation is visible. The return to the Fed's target will probably take longer and the entire process will be slowed down by still significant wage growth.

January's data, especially on a monthly basis, show the first signals of a break in the downward trend. Of course higher pricing pressure is consistent with strong demand. However, it should also be taken into account that January data were usually surprising. Let us remember that many companies adjusted their prices during this period, so the high numbers we received yesterday may be partly due to this dependence. Anyway, Tuesday's report did not bring us closer to the date of the first reduction, on the contrary, the start of the easing of monetary conditions is getting further away. the market adjusts its expectations. The Fed's May or June cut is no longer so obvious, and the market is increasingly questioning these dates.

Currently, the chances of a downward move in US rates in March are around 14%. According to the market, the May reduction has only a 30% chance of being implemented. and the June one just over 60%.

EUR/USD lowest in November last year

A rise in CPI in January will likely make the Fed want to wait and see how prices develop in the coming months. Yesterday's publication makes us even more inclined to assume that the central bank will still prefer a cautious approach. The yellow warning light that came on yesterday will certainly not allow policymakers to declare that they have won the fight against inflation. Now the market will want to see confirmation of data in the Fed's preferred measure of inflation, the PCE delator, which will be released only on February 29, together with the entire report on Americans' spending.

The interpretation of the data was quite simple and clear. The dollar gained in value, which resulted in... EUR / USD exchange rate dropped to the lowest values ​​since mid-November 2023 (1,07). The downward trend continues in the medium term. The next technical support is around 1,0670-1,0660 and perhaps this is where the local low will be located. For now, the dollar remains strong.

A significant movement was visible in the yields of US government bonds. 2-year securities "jumped" to a level above 4,62%. which is the highest level since mid-December. Wall Street indices fell off their records. Yesterday's losses for the Nasdaq Composite reached 1,8%. He also reacted negatively German Dax, which shows a "head and shoulders" formation, suggesting a larger downward correction.

Source: Łukasz Zembik, OANDA TMS Brokers