CPI kills remaining hope of a March Fed rate cut

This is not the inflation report that the Federal Reserve wanted to see and markets have responded accordingly.

Inflation in January was hotter than expected across the board. The headline and core monthly readings printed at 0.3% while the annual readings came in at 3.1% and 3.9%, respectively.

While an improvement at the headline level, it's less so than markets were positioned for and as a result, all but killed any hope of a first rate cut in March. Markets are now priced at 93% for a hold next month, quite the shift from a month ago.

What's more, only 75 basis points of rate cuts are now priced in this year; quite the drop from 175 at one point last month. It would appear traders now view the resilient economy will, in fact, come at quite a significant cost.

That said, while markets appeared to be positioned too optimistically last month, I wonder whether the pendulum has now swung too far in the other direction. We have still seen substantial progress on inflation and I expect we'll see more over the coming months. 

Gold falls below $2,000 after resilient display

The inflation data finally took its toll on gold which, after holding strong above $2,000 this year, finally crumbled under the pressure of rates staying higher. How much worse it gets for the yellow metal will ultimately depend on how bad the data gets but, under the circumstances, we're certainly back in a "good news is bad news" scenario ahead of the retail sales data. The fairytale scenario of a strong economy, low inflation, and rate cuts now looks a step too far.

Bad timing for Bitcoin

Just as bitcoin managed to climb above $50,000 for the first time since 2021, it had the rug pulled from underneath it by a nasty US inflation report. While damaging in the short run, I don't think it will dampen the mood in the crypto space too much.