So much for whispers, CPI comes in way too hot

On Wednesday, the US stock market experienced a significant decline due to higher-than-expected inflation figures.

 The S&P 500 lost 1%, and the tech-heavy Nasdaq Composite fell by 0.8%.

According to the latest data released Wednesday by the Bureau of Labor Statistics, US consumer prices rose 3.5% over the past 12 months, with an increase in the previous month.

That's up monumentally from February's 3.2% rate and marks the highest annual gain in the past six months. And while gas and shelter costs contributed more than half of that monthly increase, prices rose in almost every major category last month, the BLS said.

Indeed, it's time for risk markets to face a reality check as the rates markets undergo harsh repricing and hopes for a June rate cut from the Fed have been dashed. 

A rate cut in June was likely unrealistic from the outset. The US economy has been showing significant underlying strength, leaving little room for further slowdown in price expansion within the services sector.

Now that the data has thoroughly shattered policymakers' dovish hopes, market participants are viewing the situation through a much less dovish lens, expecting only 50 basis points of easing for the remainder of 2024. And perhaps even that is a stretch as Fed board members may consider this outlook optimistic in light of the unexpectedly hotter price pressure.

The front end took a beating on Wednesday. Twos were cheaper by 21 basis points and threes by 22 basis points in the hours following the CPI release. It marked the most acute front-end selloff of 2024 and significantly flattened the curve. 

A benign read on PCE prices later this month could offer some respite. However, with the anticipated robust advance read on Q1 GDP, the rate adjustment is expected to endure unless an unforeseen shock occurs.

The destiny of the equity rally rests on Q1 earnings season — the bedrock of fundamentals, if you may.

With the looming return of the US dollar wrecking ball, Asian markets are poised to face significant downward pressure today.

I would not want to sit in Christine Lagarde, Andrew Bailey, or Kazuo Ueda's chair today.. For months, FX traders have speculated about the fate of the euro, pound, and yen if the US economy continued to outperform, potentially delaying the first rate cut by the Fed.

Wednesday's CPI release served as the final gut punch to any remaining expectations for a June rate cut by the Fed. As expected, the euro, pound, and yen took a noose dive in response.

That poses a challenge for the ECB and the BoE, which may consider cutting rates before the Fed. Lagarde will likely confirm the ECB's intention to cut in June later this week. The BoE, as you may recall, seems inclined towards cuts, as evidenced by the recent shift away from hawkish dissents in the last two policy meetings.

With oil prices maintaining their strength, we may see a test of Japan's Ministry of Finance's resolve for intervention( to ward off importing inflation), especially considering the recent movement in the yen, which may indicate a need for plunge protection measures.

In short, a stark policy divergence is emerging between the Fed and its counterparts in Frankfurt, London, and Tokyo. This discrepancy implies strength for the US dollar across the board. It presents a challenging scenario for those betting against the buck, and as usual, the surging dollar will likely act like an anvil hanging over the head of risk markets.