The Fed has a bit less ammunition: What’s next for markets

Today’s CPI report was hot and that’s driven big US dollar gains and a 1% drop in S&P 500 futures.

Will that move extend? I don’t think it will.

The talk about ‘residual seasonality’ in CPI is ramping up again and that’s fair as it seems to be the case. There are also some one-off factors around egg prices and California fires that could be factors. Moveover, this could temper the White House’s (and Congress’) appetite for a tariff fight.

On net, Fed pricing fell about 10 bps to 30 basis points for the year from 40 basis points. That sounds about right as the Fed has indicated that cutting rates now will be more mechanical once they get close to 2% and with +0.5% in January, the prospects for that took a big hit.

I don’t think the move will extend because I don’t think inflation is worsening. The big coming drag is from housing and you can start to see that unfolding in the data now and it will continue all year. US home prices are flattening and rents in many areas are going down. Those are huge components of CPI and the economy isn’t accelerating.

Of course tariffs can change those timelines but that means the focus will shift back to tariffs and potential US tax cuts. Sides are digging in regarding the US deficit and it’s not clear where it lands.

Moreover, the market isn’t really focused on fundamentals right now. There was never going to be a Fed rate cut before June and it’s been other factors driving the market. Those factors will stay in the drivers seat as I don’t think “renewed inflation” is going to take over the conversation; at least not yet.

One thing to watch going ahead will be core goods, which are highlighted here by Nick Timiraos:

This article was written by Adam Button at www.forexlive.com.