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The worst is not over – inflation data missed the estimates

A lot has happened this week in the markets - find our more about the critical events moving the markets over the previous days.

US inflation problem is far from over

As per the US Bureau of Labor Statistics, yearly inflation, calculated by the Consumer Price Index (CPI), eased to 6.4% in January from 6.5% in December, well beyond the 6.2% market projection. The CPI climbed by 0.5% on a monthly basis, as anticipated by economists.

Moreover, the Core CPI, which excludes volatile food and energy expenses, climbed by 0.4% monthly, as estimated, bringing the annual rate down to 5.6% from 5.7%.

US annual CPI inflation rate

US annual CPI inflation rate, source: tradingeconomics.com

In addition, Thursday’s data showed the Producer Price Index (PPI) for aggregate output in the United States declined from 6.5% to 6% yearly in January, significantly above the market’s prediction of 5.4%.

US annual PPI inflation rate

US annual PPI inflation rate, source: tradingeconomics.com

Similarly, the annual Core PPI declined to 5.4% from 5.5%, contrary to estimates of 4.8% from experts. The Core PPI came in at 0.5% month-on-month.

Robust retail salesΒ 

On Wednesday, the US Census Bureau reported that retail sales grew by 3.0% in January, following a 1.1% decrease in December. This outcome outperformed the market’s estimates of a 1.8% increase and aided the US dollar in maintaining its strength throughout the afternoon.

Markets spooked by hawkish FOMC governors

Loretta Mester, president of the Federal Reserve Bank of Cleveland, claimed that there was a “compelling economic reason” for a further 50 basis-point hike. In addition, James Bullard, president of the Federal Reserve Bank of St. Louis, suggested that he would not rule out backing such a hike in March, as opposed to the quarter-point increase seen earlier in the month.

Read more: From Great Depression to GFC – overview of worst recessions in history

Fed futures now indicate an 18% likelihood of a 50 basis point rate increase in March, up from 1% two weeks ago. Prior to two weeks, the question was whether or not the Fed will hike interest rates in March. Today, the baseline scenario predicts at least 75 basis points in rate rises by June.

Conclusion

In conclusion, the overall situation in the US remains chaotic. The labor market and consumers appear robust, but other leading indicators point to a recession. The inflation problem is not over, as this week’s data showed, prompting investors to expect a more hawkish stance by the Federal Reserve.Β As a result, the next weeks could see the US dollar might erase some of its previous month’s losses, while US stocks could correct their previous gains.

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