US Inflation Quick Analysis: Markets smell rate cuts, USD set to extend plunge for many reasons

The beginning of the end of rate hikes – or the beginning of the countdown toward slashing borrowing costs? That seems to be the message from markets, which are rushing forward to price the next moves of the Federal Reserve (Fed).

Is the inflation Consumer Price Index (CPI) report that great? No, but it is more than good enough. The world's largest economy is experiencing a "process of disinflation" that is somewhat frustrating but is on the right track. Markets are buying it.

Core CPI rose by 0.4% in March, as expected – but slower than in February. That is a small improvement.

A better development comes from the headline inflation data. Prices rose by only 0.1% last month, and a modest 5% YoY 0 that is high but a far cry from the peak of 9.1% seen in June 2022. While the Fed is focused on underlying inflation, changes in gasoline eventually reach other markets. 

Another reason for more optimism comes from external factors, which cause markets to see the glass half full. Investors will cling to these good enough figures to push stocks up and the US Dollar down.

What are these factors? First, the banking crisis seems to be over. With every day without bad news, memories of bankruptcies and bailouts fade away. 

Second, the effect of the shock to the financial system is felt by the Fed. Officials almost voted against raising rates last month. They are still wary, watching credit closely. 

Third, the wage component of the Nonfarm Payrolls shows inflation in the pipeline is moderating. That is another piece of good news the Fed and markets are watching. 

All in all, I expect more of what we have seen – not a whipsaw for a change.