According to economists at TD Securities, the US Consumer Price Index (CPI) readings for February brought some relief following the surprise observed in January. Market reactions to the data have been generally positive, with US yields and the USD showing slight strength, albeit remaining well contained.
Good US data is not necessarily good for the USD
Consumer price inflation in February aligned with consensus expectations, with the headline CPI increasing by 0.4% month-on-month (MoM). Despite this, the focus of the report was predominantly on the core segment, especially given the robust performance seen in January. Core inflation also saw a notable uptick of 0.4% MoM, albeit with some loss of momentum in the services category due to normalization in Owner’s Equivalent Rent (OER).
While we maintain the perspective that the May Federal Open Market Committee (FOMC) meeting remains a possibility for a rate cut, the likelihood of this outcome has narrowed. Nonetheless, we believe that today’s report does not significantly alter the Fed’s inclination to first ease by the June FOMC meeting. Looking ahead, we anticipate services inflation to gradually normalize over the coming months, particularly as the more challenging seasonal factors subside.
It’s important to note that this print does not challenge the disinflation narrative, which remains the driving force behind the Fed’s rate-cutting cycle. We have observed that positive US data alone may not necessarily bolster the USD, especially when accompanied by positive data from the rest of the world and disinflationary pressures. This narrative is expected to persist, potentially exerting downward pressure on the USD throughout the second and third quarters of the year.
