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MARKETS TODAY: Market braces for impact of CPI Data on gold, US dollar, and yields

May 15, 2024

Key Points

  • April CPI Release: Headline CPI expected to rise 0.4%, with annual rate reducing to 3.4%.
  • Core CPI: Expected increase of 0.3%, lowering 12-month reading to 3.6%.

On Wednesday, the U.S. Bureau of Labor Statistics will release April’s consumer price index (CPI) data. This key economic report is closely watched by market participants due to its implications for the Federal Reserve’s monetary policy.

Tuesday’s elevated producer price index (PPI) results have raised concerns that inflation figures might also disappoint, potentially undermining the disinflationary trend observed in late 2023. This trend has appeared to stall this year, raising questions about the direction of inflation.

Upcoming CPI Data Release

Consensus estimates for the headline CPI suggest a rise of 0.4% on a seasonally adjusted basis, reducing the annual rate slightly to 3.4% from 3.5%. The core CPI is expected to increase by 0.3%, lowering the 12-month reading to 3.6% from 3.8% in March.

The Federal Reserve has indicated it may wait longer to start easing policy restraint. However, an upside surprise in the inflation data could prompt a more aggressive stance from the Federal Open Market Committee (FOMC).

Inflation remains above the Fed’s 2% target, with a bumpy path anticipated to reach this goal. April’s hotter-than-expected producer prices indicate persistent inflation. The core PCE price index has remained steady, with a year-over-year change of 2.8% in March, matching February but slightly above expectations.

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If the inflation data exceeds expectations, it could indicate that the recent robust CPI readings are part of a new trend of reaccelerating costs. This might lead the Fed to reconsider its current policy path and potentially implement more rate hikes.

As of Tuesday, markets were pricing in a roughly 49% chance of a rate cut at the Federal Reserve’s September meeting.

Higher-than-expected inflation could shift market expectations away from a rate cut in September, possibly delaying any easing to December or beyond. This scenario would likely result in upward pressure on yields and the US dollar, which would be bearish for gold prices.

Conversely, if the inflation data falls below Wall Street’s projections, it could lead to lower yields and a weaker US dollar, creating a positive environment for precious metals. This would revive hopes of a Fed pivot to a looser stance in early fall.

In 2013, the Fed hinted at tapering its bond purchases, leading to a sharp rise in yields and a stronger US dollar. Gold prices dropped significantly as a result.

When will April’s CPI be released?

April’s Consumer Price Index (CPI) is set for release at 8:30 a.m. ET.

Consensus estimates suggest headline inflation will be 3.4%, slightly down from March’s 3.5% annual gain. Consumer prices are expected to have risen 0.4% month-over-month, matching March’s increase.

Higher energy costs, driven by increased gas prices, are expected to contribute to a firmer headline CPI. Gasoline prices are expected to stabilize in May as geopolitical risks ease, potentially limiting further increases.

The core CPI, excluding food and gas, is expected to have risen 3.6% over the past year, down from March’s 3.8%. Core prices are expected to have increased by 0.3% in April, compared to 0.4% in March.

Read more: Week Ahead: April CPI expected to not reach target

Core inflation remains elevated due to higher costs of shelter, insurance, and medical care. March saw significant increases in motor vehicle insurance (2.6%) and maintenance (1.6%), following February’s increases of 0.9% and 0.4%, respectively.

Economists anticipate slower increases in motor vehicle insurance and maintenance prices in April. They expect disinflation trends to improve in rents and healthcare, with weaker car insurance inflation and cooling labor markets contributing to this trend.

Additionally, they predict a slight deceleration in healthcare costs, driven by lower health insurance prices.

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