The highlight of the economic calendar comes early this week with US CPI due on Thursday at 8:30 am ET. It’s a straightforward economic indicator but also presents something of a philosophical problem for the FOMC.
The headline numbers are expected to show some nice improvement with the y/y reading forecast at 2.9% from 3.4% in December as a big +0.5% m/m number from January 2023 rolls off. Estimates range from 2.7%-3.3%. The m/m reading this time is forecast at +0.2%.
It’s likely though that the market will focus on core CPI, which is expected to slow to 3.7% y/y from 3.9% with a +0.3% m/m reading.
I would say there’s an upside bias on the headline and core numbers of +0.1 pp and you can see that in the economists estimates with only a slight majority at the lower numbers.
Will a 0.1 pp beat matter to the market? It could. US 10s are near the high yield of the year and may only need a nudge. The market is also struggling to find reasons to sell the US dollar.
Zooming out, what we could really use is a sense of where the Fed stands philosophically. The economy is strong but inflation is also clearly falling. The Fed doesn’t need to cut rates because employment is strong but it also doesn’t need to leave them high. So where is the middle ground? And when does that journey start?
Right now the market is pricing in a 71% chance the first cut is on May 1 but that could easily be stretched out until June. My sense is they won’t wait beyond that unless there are signs that inflation is heating up.