Sticky Inflation

Macro Markets

PayRolls Recap

This past week we had the jobs report which came in on the upside on the headline number showing 236K jobs on an expectation of 230K, including a revision on last month’s numbers, showing an increase of 14K jobs. The unemployment rate dropped to 3.5% and the labor participation rate rose.

Given the strong March jobs report and the expected sticky core CPI report, there is a 75% chance that we experience a rate hike of 25 bps. Although a 25 bps rate hike would be much lower than anticipated before the Silicon Valley Bank meltdown, and as the stress in the banking system eases, it may give the Fed more room to keep pushing rates higher past the month of May.

The market has definitely been under pressure in equity and risk markets since Friday's numbers, but crypto has bounced back after selling off initially, outperforming most markets.

CPI THIS WEEK

This week we have FOMC minutes, but the focus is back on CPI as Wednesday's meeting will be the primary driver of the market. This is one of the first times that we will see core CPI possibly rising more than headline CPI. Inflation is definitely sticky and laggy and not showing a strong trend of moving down, which will definitely put the Fed on alert to hike more.

Whether the headline CPI meets expectations or misses some, will not matter; the Fed is still likely to raise rates by 25 bps in May. The odds of a Fed rate hike have increased to 75% from around 50% before the jobs report. Unless there is a significant miss on CPI, it won't matter. The Fed's goal is to get the Fed Fund rate above 5% because inflation remains too high. This development may upset the equity market, as it has already priced in a Fed pause and rate cuts due to the recent rally since mid-March and the strong performance in the technology-heavy and interest-rate-sensitive NASDAQ.

For March, CPI is expected to rise by 0.2% month over month and 5.1% year over year, which is lower than the February reading of 0.4% and 6.0%. Meanwhile, core CPI is expected to rise by 0.4% month over month and 5.6% year over year. In February, core CPI rose by 0.5% and 5.5%. If core CPI rises by 5.6%, it will be the first time since September that it has increased and the first time since the beginning of 2021 that core CPI is rising faster than headline CPI.

Meanwhile, the Cleveland Fed is projecting core CPI to rise by 5.7%, slightly higher than the analyst median estimate of 5.6%. Unfortunately, we can't rely on inflation swap pricing this time because there is no pricing available for core CPI, only for headline CPI. The swap market suggests that headline CPI will rise by 5.1%, which aligns with analysts' expectations. However, based on those swaps, inflation is expected to increase in April, with year-over-year gains of 5.2%.

We are expecting sticky inflation with the possibility of a higher-than-expected print.