The CPI Inflation Report and the FOMC Meeting Minutes Shift Market Sentiment

Today, the U.S. Bureau of Labor Statistics released its most current report on inflationary pressures via the March CPI (Consumer Price Index) report. Concurrently, the Federal Reserve released the minutes from last month's FOMC meeting. Combined, these two reports had a noticeable impact on market sentiment regarding the Federal Reserve's monetary policy moving forward.

Firstly, the BLS revealed that "In March, the Consumer Price Index for All Urban Consumers increased 0.4 percent, seasonally adjusted, and rose 3.5 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in March (SA); up 3.8 percent over the year (NSA)." The report came in above forecasts of economists polled by Reuters and Dow Jones, which is why we saw an immediate rebalancing, with U.S. equities and gold moving lower – a direct reaction to U.S. Treasury yields and the dollar moving higher.

Secondly, the minutes from the March FOMC meeting revealed that many Federal Reserve officials expressed concern and the need for a larger degree of confidence that inflation is moving towards their 2% target. In essence, the minutes suggested that the Federal Reserve is genuinely concerned that inflation wasn't decreasing as quickly as they had hoped.

Collectively, this new information about inflation and the conversation held by Federal Reserve officials quickly led to significant volatility and price changes in multiple financial sectors and markets. Treasury yields moved higher as investors challenged the timing of the first rate cut and the number of rate-cuts the Federal Reserve will implement this year. Higher treasury yields supported a strong upside move in the dollar index. As of 5 PM EDT, the dollar was up 1.04%, taking the dollar index to 105.258.

Because gold pricing is inversely correlated with the dollar, there is a strong negative relationship between dollar strength and gold prices. Spot gold declined by 0.79% or $18.68, taking spot gold to its current value of $2,333.46. The most active April futures contract of gold is currently down 0.59% or $14, fixing gold futures at $2,348.40. Because the net declines in both spot gold and futures were less than the gains in the dollar index, one can derive that it was dollar strength that accounted for more than 100% of today's decline, and that fractional or modest buying continues to be prevalent in current gold pricing.

The question becomes: what is the longer-term impact on the monetary policy of the Federal Reserve and investor sentiment regarding upcoming rate cuts? Was today's decline in U.S. equities and gold an initial drop leading to a price correction in both asset classes?

Firstly, it is obvious that because inflation has been elevated for the last three months, it could be the beginning of a trend rather than a one-off. This will influence upcoming decisions made by the Federal Reserve regarding the timing and magnitude of rate cuts this year. The FOMC meeting minutes released today revealed some policymakers have shown "misgivings that inflation, while easing, wasn't doing so in a convincing enough fashion," according to an article by CNBC.

The CME's FedWatch tool also revealed that the probability that the Fed will announce its first rate cut at the conclusion of the June FOMC meeting declined from a 56.1% probability yesterday to an 18.5% probability today.

However, many analysts, including myself, believe that at best, the Federal Reserve is still anticipating a total of three 0.25% rate cuts, which could begin at the July FOMC meeting, with additional rate cuts in November and December.

That being said, today's inflation report combined with the FOMC meeting minutes suggest the possibility that the Fed could address these concerns by only cutting rates by 0.5% this year. This could be accomplished by cutting rates with only two 0.25% rate cuts – one in July and the other in December – if inflation continues to run hotter than anticipated.

Wishing you as always good trading,