Much stronger US CPI data drive US rates up; just one Fed rate cut this year now priced in. Stronger USD post CPI reverse course. NZD recovers

Much stronger than expected US CPI inflation data were market-moving, driving higher US rates, a stronger USD and weaker US equities.  Some of this reversed with the other market moving event being President Trump’s call with President Putin, with talk of negotiations to end the Russia/Ukraine war.

Across the monthly and annual headline and core CPI inflation readings, the data were either one or two tenths above market expectations. The headline CPI for January rose 0.5% m/m, driving the annual increase to a seven-month high of 3.0%.  The CPI ex food and energy index rose 0.4% m/m, seeing the annual increase tick higher to 3.3%.  The monthly increase, coming in at 0.446%, was on the verge of rounding up to 0.5%. Despite the annual updating of seasonal adjustment factors being included in the release, some argue that January includes some residual seasonal adjustment issue that continues to inflate January figures somewhat – the seasonal adjustment process still not adequately capturing the recent trend to lift prices at the start of the year.

Higher inflation was broadly based and the services figure excluding housing and energy – a component monitored by the Fed to judge core domestic inflationary pressure – rose a chunky 0.8% m/m. Strong inflation follows the stronger than expected average hourly earnings data from Friday’s employment report and ahead of any inflationary impact from forthcoming tariffs.

This inflation backdrop got the market’s attention, seeing pricing for possible Fed easing this year pare back to just one rate cut, fully priced by December. The US 2-year Treasury yield is up 8bps for the day to 4.37%, towards the top of its three-month trading range, while the 10-year rate is up 9bps to 4.63%, up some 20bps since pre-Friday’s payrolls report but shy of the January high of 4.81%. Inflation expectations as measured by 10-year break-even rates, are up 2bps to 2.49%, on track for their highest close since 2023.

Fed Chair Powell spent a second day in front of lawmakers and when questioned on inflation he said “I would say we’re close, but not there on inflation.  And you did see today’s inflation print which says the same thing…we made great progress toward 2% last year, but we’re not quite there yet, so we want to keep policy restrictive for now.” This was a similar message to yesterday and from the January FOMC meeting, so at this stage he hasn’t put undue emphasis on the stronger wages or CPI print.

The other market moving event overnight was President Trump’s post on Truth Social where he said that he had a lengthy and highly productive phone call with President Putin. Much of the post talked about ending the war between Russia/Ukraine and agreeing for their respective teams to work closely and start negotiations immediately.

Oil prices were already falling ahead of this post, and the message reinforced that move, with Brent crude now down 2% to below USD75.50 per barrel.

EUR has been a key beneficiary of Trump’s Truth Social post, with the market seeing a clearer pathway for the end of the war.  While the USD was broadly stronger post the CPI print, EUR strength has seen a reversal of the positive move in the DXY index, which is now down modestly for the day.  EUR traded down below 1.0320 but has rebounded to 1.0420. Of note, there was also a paring of ECB rate cuts this year, with 77bps priced, down from 83bps.

The NZD traded down to just over 0.56 overnight before recovering to 0.5660. NZD/EUR has fallen to 0.5430 on EUR strength. AUD fell to 0.6235 and has recovered to 0.63. NZD/AUD has been drifting down all week and traded down to a fresh low of 0.8975. JPY has been the weakest of the majors, with yesterday’s weakness attributed to fears of Japan being ensconced in a trade war with the US, which would put a halt to the BoJ’s tightening cycle.  Higher global rates overnight have added to further yen weakness. NZD/JPY is up 1.3% for the day to 87.4.

In equity markets, the S&P500 fell just over 1% on the open, reacting to the stronger CPI data, before a recovery ensued, and the index is down just 0.2% in early afternoon trading.

Yesterday in the domestic rates market, yields were higher, with the market trying to absorb the risk from the large $5.5b 10-year NZGB syndication deal the previous day.  Long-end swaps led the move higher in rates, with 10-year swap ending the day up a chunky 8bps to 4.16%, with the 2-year rate up 4bps to 3.48%.  The NZGB 10-year rate rose by “only” 5bps to 4.65%. Higher offshore rates overnight will impart an upside bias to yields today, with the 10-year Australian bond future up 7bps in yield terms since the NZ close.

On the calendar today, NZ electronic card transactions data and the RBNZ’s survey of expectations are released. UK monthly GDP and US PPI data are the key releases tonight.