Wall Street Wrap: US indices unfazed by hotter-than-expected US CPI print

Market Recap

The US consumer price index (CPI) data came in hotter than expected for the second straight month, proving that there is still some persistence in pricing pressures and that the final stretch of bringing inflation to the 2% Federal Reserve (Fed)'s target remains a challenging process. The US headline inflation came in higher at 3.2% versus previous 3.1%, while the core aspect was down to 3.8% from previous 3.9%, but lacks the progress expected by markets (3.7% consensus). Month-on-month, the core inflation rose 0.4%.

The data will support the view for the Fed to exercise more patience in its rate-cut process, but Wall Street stood unfazed, potentially with the firm belief that its previous recalibration for the Fed’s first rate cut to be in June will suffice. Growth sectors recovered from its last Friday’s losses, with the S&P 500 delivering yet another record close. The Magnificent Seven stocks are once again the heavy-lifters for market gains, with notable performance in Nvidia (+7.2%), Microsoft (+2.7%), Meta (+3.3%) and Amazon (+2.0%).

Treasury yields reacted higher to the stronger inflation print, with the US two-year yields briefly touching the 4.6% handle, while the US dollar firmed slightly (+0.1%), albeit a lacklustre reaction to the high-for-longer rate narrative. That is sufficient to trigger a downside move in gold prices (-1.1%) however, with the profit-taking amplified by its extreme near-term overbought technical conditions.

Look-ahead: PPI data on Thursday, FOMC meeting next week

We will have the US producer price index (PPI) release coming Thursday, but with markets being so forgiving for the February CPI data, there is a possibility that any higher-than-expected read in producer prices may be shrugged off as well.

The key risk to watch may be the upcoming Federal Open Market Committee (FOMC) meeting next week, where the odds are surely raised for policymakers to revisit their dot plot projections. A potential revision to two cuts this year from the initial three cuts could be likely, as persistence in pricing pressures could feed into higher inflation forecast in its Summary of Economic Projections.

If that plays out, market rate expectations may be due for some recalibration once more, as current pricing still leans towards three to four 25 basis point (bp) rate cuts by the end of this year.

What to watch: US dollar sees more muted response to hotter-than-expected CPI

Initial gains in the US dollar in reaction to the hotter-than-expected CPI were pared throughout the overnight trading session, with the US dollar still hovering around the lower edge of its daily Ichimoku cloud support. Failure to defend the cloud support could reinforce the current downward bias, potentially paving the way to retest the 101.80 level next.

For now, its daily relative strength index (RSI) has dipped below the key 50 level for the first time since January this year, which puts sellers in broader control. On the upside, a move above yesterday’s high may pave the way for some near-term relief to retest the 103.63 level next.