Stocks Loved U.S. Inflation Data, But the Dollar Fell. What Gives?
Stocks Loved U.S. Inflation Data, But the Dollar Fell. What Gives?
By:Ilya Spivak
Stock markets cheer and the dollar falls after a pleasantly “normal” U.S. inflation update
- Stock markets embraced U.S. CPI data that kept core inflation at an even keel.
- Priced-in monetary policy expectations now a bit more hawkish than the Fed’s.
- U.S. dollar down, gold up amid bets on an FOMC back in “maintenance” mode.
Stock markets resolved to head higher after economic data from the Bureau of Labor Statistics (BLS) showed that inflation in the U.S. was a bit slower last month than the markets were expecting. The headline consumer price index (CPI) rose 2.3% year-on-year in April, marking the slowest growth since February 2021.
The core CPI reading excluding volatile food and energy prices – a focal point for Federal Reserve officials – held steady at 2.8% year-on-year. That matched the four-year low set in March. Service sector prices were the largest disinflationary influence within the figures, while the cost of goods flipped back to narrowly inflationary territory.
Traders push out Fed rate cut timeline despite cooler inflation
Nevertheless, services accounted for the lion’s share of overall price growth, contributing to 2.18 percentage points (ppt) of the 2.3% headline increase. By contrast, the goods sector added just 0.02ppt. The influence of food and energy prices held broadly steady from the prior month, amounting to 0.37ppt and -0.26ppt respectively.
Despite the lower-than-expected outcome, traders seemed to conclude that the results took some pressure to cut interest rates off the Federal Reserve. Fed Funds futures have priced out a rate cut in July, pushing it further ahead to the September meeting of the policy-setting Federal Open Market Committee (FOMC).
In all, the markets now price in 88 basis points (bps) in cumulative rate cuts through year-end 2026. That puts traders on slightly more hawkish footing than the U.S. central bank itself. It has projected 100bps in cuts over the same period in December and again in March, with the stimulus delivered in equal 50bps increments this year and next.
Stocks rise, U.S. dollar falls as markets embrace “normal” CPI data
The bellwether S&P 500 stock index lurched upward after mulling over the numbers for about an hour, rising to a ten-week high. The tech-tilted Nasdaq 100 was still more enthusiastic, jumping to levels unseen since late February. This seems to mean that the markets read the outcome as a favorable wellness check for the U.S. economy.
Indeed, the shifting of the rate cut calculus to slightly less dovish setting seemed to be taken to imply the absence of an economic growth emergency that might beckon the Fed into urgent action. Bets on a return to the central bank’s “maintenance” rate cut trajectory after recent paralysis weighed on the U.S. dollar and underpinned gold.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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