US CPI Shocks market, USD Up Commodity Currencies Down


Rates as of 0500 GMT

Market Recap

A bad, bad day for risk assets. European stocks closed somewhat higher on optimism about economic reopenings and the commodity boom, but the mood changed after the US consumer price index CPI came out far above expectations at 4.2 yoy 3.6 yoy expected, 2.6 previous, the fastest pace of increase since 2008.

As a result, US breakeven inflation rates moved everhigher, particularly the 5year rate, which is where attention is focused nowadays.

And bond yields moved higher across the curve although they closed below their highs after a successful 10year auction.

With yields moving higher and inflation expectations becoming increasingly unanchored from 2, expectations grew that the Fed might have to start normalizing monetary policy earlier than previously expected.

Of course, Fed officials speaking yesterday pushed back on this idea. Fed Vice Chair Clarida said he was surprised by the steep rise in the CPI but nonetheless expected inflation to return to or perhaps run somewhat above our 2 longerrun goal in 2022 and 2023, an outcome that would be entirely consistent with the Feds new flexible average inflation targeting FAIT framework. He did say though that we would not hesitate to act to bring inflation down if necessary. Similarly, Atlanta Fed President Bostic V said he was surprised by the figure but that he was expecting a lot of volatility at least through September in the inflation data as transitory and base effects…


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