13/05/2021

Market report: US could be forced into rate hike


USD

Highly anticipated US inflation data was released yesterday. This was of great interest to investors who had grown increasingly nervous about growing inflationary pressures at home and abroad. 

It wasn’t good news. Data showed the inflation rate jumped to a 13-year high. And it was a similar story for core inflation, which rose by 0.9%, the highest monthly gain since 1982. Wall Street stocks and US government bonds duly responded and dropped. This all heightened concerns that the Federal Reserve could be forced to tighten monetary policy earlier than expected.

Consumer prices in the US increased 4.2% in April, year on year, the most rapid increase since 2008. Analysts had been expecting a 3.6% reading. US government debt also experienced pressure, sending the yield on the 10-year Treasury note to 1.69%. This caused USD to rise sharply but it soon leveled off.

Despite all this, the Fed said they were in line with expectations, deeming the data “transitory”. Fed vice-chair Richard Clarida said he expected price rises to exceed the target for “the next few months” but was still surprised by the number. The Fed have already made it clear that they will allow the 2% inflation target to be be exceeded for a while, giving the pandemic hit labour market vital time to recover.

Before yesterday’s release, the Fed said it’s employment that really matters when considering monetary policy. Given the poor non farms release last week, investors were inclined to take the Fed’s word that rate hikes were a way off. But after yesterday’s readings, the pressure to start discussing the appropriate timing of tapering and hiking interest rates will now likely increase.

Key announcements (GMT)

12:30-USD- US initial jobless claims (previous 498k, consensus is 490k)
16:00-GBP– Bank of England Governer Andrew Bailey speech


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