CPI Chaos Clears Up: Rates Still Haunting the Dollar
Got a blast of market hysteria yesterday when the March U.S. CPI zoomed in? Yeah, that was the roller‑coaster ride that shoved equities and treasuries down the slope, while the greenback flexed its muscles. But let’s pull back the curtain a bit – the long‑term picture still looks pretty much the same.
What’s Actually Staying the Same?
- The next big move? A rate cut, not a hike.
- FOMC’s main focus is how long the fed funds rate stays steady, not how high it climbs.
- If the economy or financial stability takes a hit, the Fed’s ready to cut more aggressively and step in with liquidity if needed.
Why I Stay Bullish
Whether the cut lands in June, July, or September, and whether the easing is 50bp or 75bp – or even more or less – the policy direction isn’t shifting. The Fed’s got that “Fed put” feeling alive, keeping volatility low and dips shallow. The market’s got that safety net.
New Angle on FI & FX
- Risk is tilting more hawkish for the FOMC than for other G10 banks.
- ECB cuts in June; BoE, BoC, and SNB likely follow.
- RBA and RBNZ to cut later in summer.
- Downside inflation risks are higher and labour markets are more slack compared to the U.S.
That means rate differentials are widening in favor of the U.S., the dollar stays strong against its peers, and the USD hits fresh YTD highs.
Treasuries & Inflation
The FOMC still plans a cut this year, even with that bumpy ride back to 2% inflation. Policymakers now see the target as a range rather than a fixed point. This will keep inflation breakevens trading at around 2% as the floor, while long‑end rates can still fall if the easing cycle is milder, inflation stays high, and rates get higher.
Front‑end selling might be limited because expectations still lean toward easing. So 2% bonds yielding 5% looks like a good buy, and the curve as a whole should start to steepen again.
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