Today’s US February CPI report beat estimates with a 0.1% headline and a 0.2% core gain, with increases that rounded from a restrained 0.089% for the headline but a sturdy 0.223% for the core. The outcome showed the largely expected big energy price drop of -2.0%, but a 0.4% rise for food prices.
With the market focused on the US impact of COVID-19 (with reported cases in the US now over 1,000) and the OPEC price war, today’s firm February gains added little to the outlook. For what it’s worth however, we still have a slight down-tilt for monthly CPI gains going into the crisis, given 6-month average price gains, and the core, that both undershot respective 12-month average gains. The March oil price plunge will sharply depress the y/y inflation metrics into mid-year, as we unwind the Q1 y/y boost from hard comparisons. The drop will give the Fed room to ease policy as much as it wants with little criticism.
As additional Fed rate cuts are priced in and amid ongoing safe haven flows, Fed funds futures are on the rise. Supporting the rally in the futures are the continued weakness in equities amid growing fears over a recession resulting from COVID-19, the damping effect on inflation, and the widening response from global central banks. The implied March contract has fallen to 0.76%, suggesting another 50 bp rate cut is anticipated next week. Meanwhile, June is priced at a remarkable 0.15% as the market flirts with the potential of negative rates.
However, there are many Fedwatchers who continue to believe aggressive rate cuts are a wrong-headed response to the COVID-19 crisis, if for no other reason than that the 0% or negative rate experiments in Europe and Asia have not been successful. The cascading effects of G7 easings could make life very difficult for emerging markets, with global knock-on effects.
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