USD Down despite CPI, NZD Up despite RBNZ; Powell QA

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Rates as of 0500 GMT

Market Recap

A big surprise with regards to US inflation. I had been concerned that despite the assurance from the Fed and White House that rising inflation is only temporary, the market would take it more seriously and send Treasury yields and the dollar up. When yesterdays consumer price index CPI came out even higher than expected, I thought this is it. The 0.6 mom rise in the CPI was the largest since August 2012.

Although one of the reasons for the acceleration in the yearonyear rate of change is the base effect the fall in prices in the like yearearlier month if we look at the latest three months on an annualized basis, that too showed prices rising a lot faster than expected. Of particular note is the faster rise in core prices on this basis core inflation had been expected to slow to 0.5 yoy from 0.7, but instead it accelerated to 1.9. That almost puts it at the Feds 2.0 target.

But the markets reaction was totally the opposite of what I had expected! Inflation expectations fell 1 bp, Treasury yields fell 6 bps and the dollar fell with them. Apparently people were relieved that it wasnt even worse. Also, the auction of 24bn in 30year bonds the reopening of an existing bond came 1.8bps below the yield on the existing bond, showing strong demand for bonds regardless. This helped real yields to decline.

The rise in the inflation rate was caused by the expected factors. Oil was high on the list; according to the Bureau of Labor…

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