US April CPI Inflation Leaves Markets Uncertain Again

Markets hd been waiting for the April CPI inflation report from the US all week, since wojuld give some clues where the FED will be headed next. The report provided some relief to the market as it did not exceed expectations and offered hope for lower prices in the future, which sent the USD lower across the boardinitially.

Although, while the inflation rate remains significantly above the FED’s 2% target, the situation could have been worse for the USD. Prices for used cars and trucks increased by 4.4%, and energy prices rose by 0.6% on a monthly basis. Gasoline prices also went up by 3.0%. The cost of shelter continued to rise, albeit at a slower pace compared to the previous month (0.4% in April, compared to 0.6% last month and 0.8% in February).

Over the course of the year, shelter costs have risen by 8.1%. Since shelter accounts for 34% of the overall CPI, it has been a significant contributor to the elevated inflation observed in the past year. Analysts still anticipate a moderation in housing costs in the coming months. Food prices remained unchanged for the second consecutive month, but they have increased by 7.7% over the year. Food prices constitute 13.7% of the CPI.

After looking at the details, markets became less certain that inflation is really falling and the USD claimed some of the losses back. Although, safe havens sucbh as the CHF and the JPY kept the bullish momentum among the uncertainty. As a result, we will try to sell USD/JPY on a retrace higher. EUR/USD is also showing vulnerability, so we are keeping an eye an that as well since we have a long term sell signal open.

US April CPI Inflation Report

• April CPI YoY 4.9% versus 5.0% expected. Lowest since February 2021
• April CPI MoM 0.4% vs 0.4% expected
• March CPI MoM reading was 0.1%
• Core CPI MoM 0.4% versus 0.4% expected
• Core YoY 5.5% versus 5.5% expected
• Shelter 0.4% versus 0.6% last month

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased by 0.4% in April on a seasonally adjusted basis, following a 0.1% rise in March. Over the last 12 months, the all items index grew by 4.9% before seasonal adjustment. The shelter index was the primary contributor to the monthly increase (up 0.4%), accompanied by growth in the used cars and trucks index (up 4.4%) and the gasoline index (up 3.0%).

The energy index increased by 0.6% in April (-5.1% year on year), while the food index remained unchanged (7.7% year on year). The index for all items less food and energy also rose by 0.4% in April, with several indexes, such as shelter and motor vehicle insurance, experiencing increases. However, the airline fares and new vehicle indexes declined during the month. The 12-month increase of the all-items index was 4.9%, marking the smallest growth since April 2021. The “all items less food and energy” index increased by 5.5% over the last year, while the energy index fell by 5.1% and the food index rose by 7.7%.

• The Fed funds rate (5.00% to 5.25% target range) is now above the year-on-year inflation rate of 4.9%
• Yields are lower after the report with the 2 year yield now down -7.1 basis points, while the 10 year yield is down -6.6 basis points.
• Stocks are trading higher. The premarket futures are implying the Dow industrial average up 70 points. The S&P up 16 points, and the NASDAQ index up 63 points.
• Next month, the headline CPI MoM level from a year ago rose 1.0%. If that can be replaced by something much less (say we get used car prices back down and shelter lower), we could lop 0.8% or so from the YoY number. The number after that was a 1.3% gain. So going forward 2.3% will come out of the YoY number. Replace that with 0.6% and 1.7% and 5% becomes 3.3%.