DXY Index ended the overnight session at 103.3, barely changed from Monday. The USD Index and the 2Y US Treasury bond yield initially fell to 102.6 and 4.42%, respectively, when US CPI for January met expectations at 0.5% MoM and 0.4%, respectively. They quickly recovered to 103.3 and 4.62% after markets realised disinflation had lost some momentum. CPI inflation slowed less than expected to 6.4% YoY in January; Bloomberg consensus had expected a drop to 6.2% from 6.5% in December. Core CPI also fell less from 5.7% in December to 5.6% in January, above the 5.5% consensus. The PCE deflators out on 24 February will not deviate from CPI and see the Fed leaning towards revising this year’s rate target above the 5.1% pencilled last December.
US 6M Treasury bill rose above 5% for the first time since 2007 on the belief that a tight labour market and sticky inflation would bolster the Fed’s case for rates to peak and pause above 5% this year. Following the CPI results, Fed President John Williams (New York) saw some risk of inflation staying higher than initially estimated. Lorie Logan (Dallas) noted that core services inflation excluding housing had been high at 4-5% for nearly two years. The sector contributes 55% to the PCE core deflator and is sensitive to the labour market. Tomorrow, we see Fed Presidents Loretta Mester (Cleveland) and James Bullard (St Louis) concurring with Williams for the Fed Funds Rate to end 2023 between 5% and 5.5%.
Today, consensus expects the US NAHB Housing Market Index to recover a second month to 37 in February. The index bottomed at 31 in December and rose to 35 in January. Pending home sales also increased in December after six months of declines. Mortgage rates fell in November-January on US bond yields holding below the policy rate and ignoring the last two Fed hikes. However, mortgage rates started inching higher after the Fed began to push for higher for longer rates. Markets will also be looking for signs that the US economy was not as weak as initially feared, i.e., advance retail sales and industrial production turning positive month-on-month in January from the negative numbers in December; and capacity utilisation picking up in January after three months of declines. Upside surprises in these numbers will embolden the Fed to steer monetary policy towards restrictive territory and keep it there for the rest of the year.
Quote of the day
“I anticipate we will need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2% target in a sustainable and timely way.”
Dallas Fed President Lorie Logan
15 February in history
The first draft of the complete human genome is published in Nature in 2001.
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