Chances of 50-point Rate Hike Increases as US CPI Hits 40-year High

On Thursday (GMT+2), the US released its Consumer Price Index data (CPI) for January. Results showed that inflation, as measured by the CPI, increased by 7.5% year-on-year, beating out the forecasted 7.3% and posting the highest gain since 1982. The results also mark an increase of 0.6% from December, continuing the fourth straight month of annual gains exceeding 6%.

As a result, January’s CPI numbers have significantly increased market expectations for an even more hawkish Fed. This comes especially after St Louis Federal Reserve Bank President James Bullard called for large interest rate hikes – 100 basis points by 1 July – to combat inflation. The market has now priced in a 62% chance for a 50-point hike for the March Fed meeting, where it is expected that the Fed will announce its first interest rate rise of the year.

Post-market

In response to the CPI and rate numbers, the Dollar Index swung up 0.5% before ending the day flat. While increased rates would normally boost the dollar, Bipan Rai, head of FX strategy at CIBC Capital Markets, explains that the “markets are already sufficiently long dollars…and are keen to take profits

Even then, gold prices are slipping today as the appeal of the non-interest-paying bullion lessened with increasing interest rates. This comes after gold hit a two-week high on Thursday, with David Meger, director of metals trading at High Ridge Futures, explaining that a high-rate environment would “nip at the heels” of the gold market. However, Meger adds that ongoing inflation is the “underlying fundamental push behind gold’s recent move”.

Treasury yields have also hit new highs, with the 10-year note breaking 2% for the first time since 2019, with UBS analyst Giovanni Staunovo guessing that “market participants are now pricing in six rate hikes this year”.

Meanwhile, oil prices have stood steady in the face of the impending hikes, and despite the OPEC report showing that it massively undershot its pledged output in January, increasing its production by just 64,000 bpd instead of the planned 254,000 bpd.

In the meantime, investors are advised to keep an eye out for the upcoming IEA monthly Crude Oil report, which will be released on Friday 11 Febrauary, 11:00 (GMT+2). As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.