Thursday saw most markets experience downward movements following forecast-topping US inflation data, which dashed hopes for a June interest rate cut and prompted a reassessment of monetary policy outlooks. The dollar surged to a 34-year high against the yen, sparking speculation that Japanese authorities might intervene to stabilize their currency.
The consumer price index revealed a 0.4 percent increase on a monthly basis and a 3.5 percent rise year-on-year, surpassing consensus estimates for the third consecutive month. Observers cautioned that this uptick might not be transitory but could indicate a troubling trend. This data, coupled with other robust economic indicators such as a forecast-beating jobs report, suggested that the US economy remained robust despite elevated borrowing costs and inflation exceeding targets.
Federal Reserve officials now have more to consider ahead of their May policy meeting, with their guidance of three rate cuts this year thrown into uncertainty. Investors who began the year anticipating six rate cuts, with the first expected in March, are now reevaluating their expectations, with the likelihood of a June reduction diminishing.
Some analysts, like Torsten Slok of Apollo Global Management, remain unconvinced that the Fed will cut rates in 2024. Lawrence Summers, former Treasury Secretary, even suggested that traders should entertain the possibility of the next rate move being upwards rather than downwards.
Despite concerns about inflation, minutes from the Fed’s recent meeting indicated that policymakers still envisioned rate cuts this year. While acknowledging recent inflationary pressures, some participants cautioned against dismissing them as statistical anomalies. However, a few noted that residual seasonality might have influenced inflation readings earlier in the year.
The disappointing inflation data sent all three major Wall Street indexes sharply lower, with Asian markets following suit initially. However, some markets later rebounded into positive territory or trimmed their losses. Key Asian currencies like the yen and won weakened, providing support for exporters.
The surge in the dollar to 153.24 yen, its strongest level since 1990, prompted attention in Tokyo, where authorities pledged to keep their options open to support the currency. However, analysts attributed the dollar’s strength more to US data than to speculative trading activity.
Overall, the market sentiment remains cautious as investors await further developments, particularly regarding the Fed’s monetary policy stance and inflation trajectory.