Indices and Oil rally on inflation data, was it justified?

Headline US inflation numbers looked good today. Stocks rallied on the data release. Cooling headline US inflation pleased markets: suggesting that the Fed’s rate monetary tightening to this point is doing its job, and inflation is being tamed; allowing the Fed to pivot sooner than anticipated and signal a peak in rates. Was this really the case? Core inflation remains sticky, justifying another 25-basis point rate hike, based on this morning's data within the context of previous statements from the Federal Reserve.

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Was today’s inflation data really that good?

Today’s good March CPI numbers were largely the product of collapsing energy prices in March, combined with falling demand for used cars. Declining used car prices might reflect problems in the economy, except new car prices were rising, suggesting a shift in demand away from old to new cars. Gasoline prices fell 4.6% month-on-month in March, and they are down 17.0% year-on-year. Fuel oil saw similar declines, while natural gas prices fell 7.1% month-on-month. But falling energy prices are temporary. We only need to look back to last week on Monday when the crude oil market gapped sharply higher on the OPEC+ announcement of a production cut to see what we can expect once demand returns.

Inflation pressures remain strong in the service, shelter, transportation, and food categories. Services less energy were up 0.4% month-on-month and up 7.1% year-on-year. Shelter was up 0.6% month-on-month and 8.2% year-on-year. Transportation was up 1.4% month-on-month and 13.9% year-on-year. Food consumed away from home was up 0.6% month-on-month and 8.8% year-on-year. This is now partially being offset by an easing of inflation for food consumed at home, which had been a major inflation factor.

The inflation silver lining in the data is that the month-on-month inflation pace for services less energy and for shelter are the lowest in several months, suggesting some easing of upward pressures in those sectors. That’s a positive. But inflation pressures are growing for transportation and food serviced away from home. What happens when demand for energy returns?

Headline US Inflation data better than expected, core inflation as expected

• The US consumer price index (CPI) rose 0.1% month-on-month in March, below analyst expectations of 0.3%, and down from 0.4% in February
• CPI inflation was up 5.0% year-on-year in March, below analyst expectations of 5.2%, and down from 6.0% in February
• Core CPI inflation, excluding more volatile food and energy costs, was up 0.4% month-on-month in March, matching analyst expectations, and down from 0.5% in February
• Core CPI inflation was up 5.6% year-on-year in March, matching analyst expectations, up from 5.5% in February
• The Federal Reserve will release the minutes from its March policy meeting this afternoon, giving more insight into the discussions taking place behind closed doors that will impact the US economy.

Indices rally after initial disappointment

• At the time of writing, the broad S&P 500 index and the tech heavy NASDAQ strengthened after early declines on the CPI report, respectively up by 0.3% and flat at 4,121 and 12,038, respectively
• The VIX, Wall Street’s fear index, edged lower to 18.5 after spiking to 19.6 on the CPI report
• The dollar index was off by 0.7% 101.2, with £/$1.25 and €‎/$1.10
• Yields on 2- and 10-year Treasuries were unchanged at 4.00% and 3.45%,

Gold, Oil keep new highs, strong trend

• Gold’s was 0.3% higher at $2,025 per ounce, continuing its recent uptrend
• Crude oil prices were almost 2% higher at $83.1 per barrel, also continuing its positive trend
• Weakness was seen in the new-crop corn and soybean contracts this morning as the forecast continues to look favorable for this year's US crop production in the Midwestern US states

Ukraine grain initiative falters, Corn and Wheat prices firming

• Corn and wheat spot prices firmed overnight as the focus shifted back again to troubles for the Ukraine grain initiative – no ships moved through the grain corridor on Tuesday due to a dispute over inspection procedures
• The Kremlin is again making statements suggesting that the future of the grain initiative is in peril
• Reduced grain flow out of Ukraine in the future that might further tighten global supplies
• European countries are rethinking accepting Ukrainian grain by land due to the negative impact it is having on local prices for their farmers
• Poland will not allow any Ukrainian grain to pass across its border over the next two to three months, while similar measures are being considered in Romania, Hungary, and Slovakia

Analysis by Arlan Suderman, Chief Commodities Economist.

Read more of Arlan’s thoughts at StoneX Market Intelligence at https://my.stonex.com/