GBP Up, USD Down after US CPI Surprises on Upside

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Rates as of 0500 GMT

Market Recap

One of the bestknown market apothegms is that the market can remain irrational longer than you can remain solvent. Never was there a better example of that than yesterday, when despite an upside surprise in an already extremely high US consumer price index CPI, stocks rose and 10year bond yields fell 6 bps. With 10year breakeven inflation rates up 3 bps, real 10year yields fell an even greater 10 bps figures dont add due to rounding. Fed funds rate expectations for this year and next were unchanged and actually down 1.5 bps from mid2023 on out.

this saying is often attributed to the famous British economist John Maynard Keynes, but in fact seems to have been invented by the US analyst A. Gary Shilling.

As is typical on a riskon day, the dollar weakened. This is also what one would expect with US real yields falling so much, thereby reducing the attractiveness of the US bond market.

Is the market really irrational, or has it simply accepted the Feds explanation that the rise in prices is only temporary and transitory? That would be a more logical explanation. Many of the biggest price increases were in sectors that have either seen supply constraints or unusual demand related to the reopening. For example, about onethird of the 5 rise in the overall CPI was due to higher prices for used cars trucks, which were up 29.8 yoy. No one imagines that prices of used cars trucks will continue to rise at that kind of pace indefinitely….

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