Markets Revise Rate-Cutting Expectations After Hot March CPI

Consumer Price Index (CPI) blowout drives 20+bp rate rise. Another day, another hot CPI print in 2024. Rates soared 20+bps higher as today’s inflation print sowed fear that elevated inflation will be persistent. The 2y UST yield (now 4.97%) rose 23bps and is just below 5%, a level not seen since November. UST yields are now 55-80bps higher year-to-date, with the largest gains at the short-end and belly of the curve. Meanwhile, the USD soared alongside rates and had its best day since January, with the Dollar Spot Index up nearly 1% on the session. Equity indices suffered, with the S&P 500, DJIA, and NASDAQ down 0.84%-1.09%.

A third month of elevated inflation raises the question – are these really just bumps? Today’s CPI print exceeded expectations across all measures, core CPI exceeded consensus estimates on either a MoM or YoY basis YTD and consumer price inflation remains above the Fed’s 2% target. ‘Supercore’ inflation, which excludes food, energy and housing was up 4.8% YoY in March, the highest in 11 months, and over 8% on a 3-month annualized pace. The question lingers – is inflation going to be persistent? Or will inflation fall to levels where the Fed can cut rates in 2024? Charles Schwab’s chief fixed-income strategist Kathy Jones said, “Even though the Fed doesn’t target CPI, it is another reason for delaying any rate cuts and/or reducing the number expected this year.” Futures markets still expect 2 rate cuts this year but have pushed out timing expectations for the first cut from June to September at the earliest.

Bank of Canada (BoC) holds rates steady, points to June as potential start-point for monetary easing. The BoC expectedly held their policy rate at 5% today for the sixth consecutive meeting, having last hiked rates in July. BoC Governor Tiff Macklem said that a rate cut in June remains possible, though the bank needs to “see it for longer to be confident that we are clearly on a path to 2% inflation.” The central bank projects that elevated gas prices will keep inflation (currently at +2.8% YoY) around 3% in Q2 before a gradual decline to 2% by the end of next year. Meanwhile, today’s US CPI print caused broader global inflation concerns, which forced BoC June rate cut expectations lower to nearly 50% from 80% yesterday.