Morning Brief – a C and a P, PI

Charles Porter
Thu 16 May 2024

a C and a P, PI

Two price indices have been released within the US this week. That released on Tuesday covered the change in prices at the producer level. On Wednesday, it was markets’ turn to look at consumer price levels. Only one of the price level readings had a meaningful impact upon markets. The other was very much sidelined by retail sales figures that were released simultaneously but might ordinarily play second fiddle to inflation data. Because these data releases have provided by far the most meaningful developments in FX markets this week, let’s take a look at both events, the data released and how the market has reacted.

Tuesday’s PPI data showed producer prices rising 0.5% month on month between March and April. Seasonal effects had meant that markets had already been expecting a rise versus the figure published the prior month. However, very few were expecting a reading quite so high. As a result, USD demand immediately spiked because the data provided bias to the narrative that inflation is not under control in the US. This raises interest rate expectations or at least diminishes the extent to which the market believes the Fed can begin to embark upon an easing cycle. As a result, yields are sustained at higher levels within US cash, helping to create USD demand. 

What was interesting about Tuesday’s move was that gains were very short lived within the Dollar. There was at least some rationale behind this move. Revisions to the March figure meant that signs of disinflation were more present than expected during the preliminary publication released in April. Additionally, some elements within the PPI data were encouraging and those same factors feature prominently within the Fed’s preferred measure of inflation, Core PCE. A sharp rise and subsequent decline in the US Dollar was therefore understandable but perhaps not completely justified. Investors in USD perhaps are weaking a blinker on one eye only. The Consumer Price Index released yesterday showed core and headline inflation falling in line with expectations. It was the retail sales figures clocking in well below expectations that added fuel to the Dollar’s fire sale. 

Discussion and Analysis by Charles Porter

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