With expectations for October’s CPI print to rise from 5.4% to 5.9% YoY already in play, today’s inflation release had to be big to disrupt markets beyond what had already been priced into the Treasury curve and in the FX space during the morning session.
With the official data printing at 6.2% YoY, the highest inflation reading since November 1990, a big print was exactly what was delivered.
While the annual figure has recently been dismissed somewhat due to base effects, strong underlying dynamics remain evident across the inflation report as a whole. Sequential headline and core readings both shot up from 0.4% and 0.2% MoM to 0.9% and 0.6% MoM respectively, while sub-categories showed that inflationary pressures were widespread – as opposed to previous readings where they were concentrated on categories subject to severe supply disruptions. For example, the last time the core MoM reading was this high was back in June at a rate of 0.9%. At that point, the growth in used car and truck prices was heavily focused on, as prices rose by 10.5% MoM. This time around, prices in that sub-category grew only 2.5% MoM, while the core reading still printed at a strong rate of 0.6%.
Headline CPI in the US jumps above 6% and to levels not seen since the 1990s; a period when inflation wasn’t an official monetary policy target and money supply was still a primary policy tool
Category breakdown of the MoM CPI readings
The CPI print itself now places pressure on the Federal Reserve, only weeks after they labelled the inflationary overshoot, reflecting factors that are “expected to be transitory”.
With price pressures now embedding into the overall economic backdrop, evidenced by how widespread the rise in inflation was over all categories in October, markets have been forced to question the Fed’s messaging yet again. Front-end rates are hurtling back above the 0.5% level, where they have failed to rebound following the string of dovish Fed and BoE meetings last week, while the Dec 2022 eurodollar contract is tracking back to prices not seen since the peak of the market’s bullish pricing for monetary policy.
December 2022 eurodollar future drops towards levels last seen prior to the Fed and BoE pushbacks (implied yield = 100 – price)
In the FX space, the dollar isn’t taking too much ground from G10 pairs, largely due to the contagion effect the release is having across core rates.
However, upwards pressure has increased in USDJPY since the release, largely due to the yen’s sensitivity in back-end yield spreads. In the EM space, the same dynamics of relative rate hikes remains the key factor too. Currencies where policy looks less responsive to higher inflation, like ZAR and TRY, are seeing losses increase against the dollar, while currencies like MXN and RUB, where monetary policy is more reactionary, are seeing a more limited reaction.
Author: Simon Harvey, Senior FX Market Analyst