US Inflation Cools to 8.3% but Eases Less than Forecast, Nasdaq 100 Sinks as Yields Rise

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US INFLATION KEY POINTS:

• April U.S. Consumer Price Index rises 0.3% on a seasonally adjusted basis and 8.3% in the last 12 months, slightly above expectations
• Core inflation advances 0.6% month-on-month and 6.2% from a year earlier, also topping forecasts
• Nasdaq 100 futures erase gains and plunge into negative territory as data suggests inflation is struggling to come down materially

Most Read: S&P 500, Nasdaq 100 Outlook - US Inflation Data to Make or Break the Market’s Spirit

U.S. inflation moderated last month in annual terms, but remained at multi-decade highs and more than four times above the Federal Reserve’s 2% target, data released by the Labor Department showed on Wednesday.

According to the agency’s latest report, the consumer price index, which measures a comprehensive range of goods and services, grew 0.3% in April after soaring 1.2% in March, bringing the 12-month reading to 8.3% from 8.5%, a sign that inflationary pressures reached the cycle’s peak at the end of the first quarter, but are still struggling to cool materially. Analysts surveyed by Bloomberg News had forecast CPI to rise 0.2% m-o-m and 8.1% y-o-y.

Source: DailyFX

Focusing on the monthly drivers of the headline figure, food prices climbed 0.9%, in line with the recent pace of increases in this category. Energy costs, meanwhile, fell by 2.7% after notching an 11% gain in March on soaring oil prices following Russia's invasion of Ukraine. This is a positive development, as it indicates that the worst of the commodity market shock may be over.

Excluding food and energy, so called core CPI, which tends to reduce transitory noise and reflect longer-running trends in the economy, advanced 0.6% on a seasonally adjusted basis and 6.2% from a year ago. The slowdown in the yearly figure, which came down from 6.5%, appears to confirm the theory that the core gauge also reached its highest point in March.

Source: US Bureau of Labor Statistics

In terms of monthly contributors for the core indicator, the shelter index rose 0.5%, matching the previous two months’ increase, amid a tight rental market. Meanwhile, transportation remained hot and jumped 3.1%, reflecting a rotation of household demand toward services consumption. In contrast, used cars and trucks continued to roll over, falling 0.4% after a 3.8% decline in March amid cooling demand and softening durable-goods prices.

With inflation slowing but not coming down materially, it is not certain that we have reached the peak of central bank policy outlook hawkishness. Against this backdrop, yields may continue to reprice higher on expectations of a more front-loaded tightening response. This scenario may exacerbate fears that the Fed’s hiking cycle will trigger a recession, undermining sentiment and complicating the equity market recovery.

Immediately after the CPI figures crossed the wires, U.S. Treasury yields jumped, prompting the Nasdaq 100 futures to erase all pre-market gains and to sink more than 1% into negative territory. Fed officials have indicated that they endorse front loading interest rate hikes in half a percentage point increments, but have shown little appetite for larger adjustments. However, faced with unrelenting inflation, the bank may ultimately deploy supersize 75 basis points hikes in coming meetings in a move to bring monetary policy to a neutral stance more quickly. This poses a significant risk for stocks.

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---Written by Diego Colman, Market Strategist for DailyFX. 11th May 2022