• Another hot core CPI print crush rate cut pricing
  • The BoC would be even more unwise to turn dovish now
  • US CPI / core CPI, m/m % SA, March:
  • Actual: 0.4 / 0.4
  • Scotia: 0.4 / 0.3
  • Consensus: 0.3 / 0.3
  • Prior: 0.4 / 0.4

Forget rate cuts in 2024? That’s a very distinct possibility. The whole front-end blew up after another strong inflation reading out of the US. The result drove a nearly instant response from markets as fed funds futures almost entirely wiped out pricing for a June cut by the FOMC. We might need to push out our own Q3 start and reduce if not eliminate easing. Markets are now pricing about a half percentage point cumulative rate cut by year-end at most. The US two-year Treasury yield is up 19bps on the day so far with a bear flattening overall curve, a stronger dollar and with the S&P losing ground.

Core inflation landed at 0.359% m/m SA. Chart 1 shows this at an annualized rate over the months. The exact numbers from November to March are 3.8% m/m SAAR, 3.4%, 4.8%, 4.4% and 4.4% in sequence. That’s incredible stickiness this far into a hike cycle.

Chart 1: Back to Back Hot US Core CPI

Chart 2 shows that it wasn’t core goods that drove it. CPI goods ex-food and energy was down by –0.2% m/m SA which extends a generally soft pattern.

Chart 2: US Goods Inflation

Chart 3 shows where the heat came from. Core services CPI (ex-energy services and housing) was up by 0.65% m/m SA. That follows prints of 0.5% in February and 0.85% in January. 

Chart 3: US CPI Core Services Ex-Housing

Chart 4 speaks to the possibility that this could flow through to the Fed’s preferred core PCE gauge when it comes out on April 26th. CPI core services is more volatile than PCE core services but PCE core services might have some catching up to do given the general correlation between the gauges. PCE core services was much softer in February than CPI core services which presents a weak jumping off point.

Chart 4: US Core Services Ex-Housing

There was also substantial breadth to the CPI figures as indicated by chart 5. 

Chart 5: US Core Service Inflation Still Showing High Breadth

Headline CPI matched core CPI because of little variation in gasoline and food prices especially in terms of weighted contributions to the overall change in CPI.

Shelter inflation remained hot (charts 6, 7).

Chart 6: US Rent Inflation; Chart 7: Sticky Housing Inflation

Transportation categories were not big drivers except for a large jump in auto insurance (charts 8–10). Clothing jumped which may be a warning to Canada after its soft readings (chart 11).

Chart 8: New vs Used Vehicle Inflation; Chart 9: Soaring US Motor Vehicle Insurance; Chart 10:: US Airfare; Chart 12: US Apparel

Also see the basket break down in m/m unweighted terms (chart 12) and in terms of weighted contributions (chart 13).

Chart 12: March Changes in US Headline CPI Categories; Chart 13: March Weighted Contributions to Monthly Change in US Headline CPI

Please also see the full table at the back of this publication for more detail including micro-charts and z-score measures of deviations from trend.

As for the BoC, they’re even less likely to turn dovish now given the risk of totally unmooring CAD with the Fed being pushed down and out.

Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown
Table: US Inflation Component Breakdown