The US consumer inflation report yesterday came in more or less within estimates and that reaffirmed the prevailing narrative on the Fed outlook. That being the central bank will likely move to the sidelines in June. Fed funds futures are now showing 95% odds of that being the case but in terms of pricing, it hasn't changed much from last week:
The first rate cut priced in is still in September, followed by two more rate cuts priced in for November and December this year.
That isn't much of a change whatsoever from the FOMC meeting decision last week. As such, the inflation numbers yesterday are only serving to rebuff the narrative but not really adding or subtracting from it.
If you want to drill deeper into the details, this chart is a great reference to how inflation developments are playing out:
As you can see, goods inflation is starting to fall off with energy price inflation already sitting in negative territory - the first time since the start of 2021. However, we are seeing a transition whereby services and food inflation is carrying the bulk of the weight now and that is keeping core inflation pressures elevated.
It will take many more months to gauge the underlying trend and to see if there will be any further drop off in price pressures.
And until we can sort that out, markets will not have an easy time working with the ongoing fundamental outlook and trading narratives.
We have reached the point where the Fed is pausing, which confirms the start of a potential pivot. But whether or not the pivot will come and how quickly it will be, depends on inflation developments in the months ahead.
So, unless there are any major surprises in the data, markets will stick to what they think is right i.e. Fed will eventually turn the corner and cut rates as inflation pressures are to ease further.
But at each and every step that said narrative gets challenged, expect there to be corrections in pricing. And for that, we will have to keep waiting on the data.
In between that period, things might get rather choppy without any real sense of major direction; all else being equal. Well, at least for now.