US Inflation Analysis: Super-strong data open door to more 100 bps hike, dollar in TINA mode

Crowded trade? Not a problem. The US dollar has received another good reason to attract flows. US inflation has hit 9.1% YoY, yet another four-decade high. The price at the pump is eroding Americans' disposable income – but prices are rising almost everywhere. 

The Core Consumer Price Index (Core CPI) is up 0.7% MoM and 5.9% YoY – both 0.1% more than expected, and showing price pressures remain broad and strong. Markets expected signs of peak inflation, but it will have to wait for longer. 

For hawks at the Federal Reserve, it shows that more needs to be done. Higher prices are not curing high prices, nor are current interest rates. The CPI reports comes just five days after the Nonfarm Payrolls, which pointed to a healthy job market and ongoing wage gains. That means consumers and businesses arre not deterred by rising prices and continue spending. At some point, real wage growth of -4.4% – the negative figures imply eroding purchasing power, will take its toll. Not yet.

Bond markets are already poiting to higher chacnes of a 100 bps rate hike – quadruple that standard 75 bps. Fed Chair Jerome Powell said it could rise by 50 or 75 bps. There currently is a 30% chance of a 100 bps hike in July. More figures like this could exacerbate the trend. 

Will stocks continue south? Not necessarily. Earnings are critical for the next moves in markets. Yet for the dollar, There Is No Alternative (TINA) is the name of the game. 

Does that mean EUR/USD parity? After two attempts, the third time will likely be charm.