CPI Inflation Slows To 4.9% In April, Fueling Market Hopes Of Fed Rate Pause In June

The Consumer Price Index (CPI) in the United States came in at 4.9% year-over-year in April, slightly below the 5% increase seen in March and the 5% forecasted by economists. 

Inflation Falls Short Of Expectations In April: What You Should Know

• The headline inflation rate rose 0.4% month-on-month in April, up from 0.1% in March and in line with expert expectations. The annual inflation rate was 5.5%, continuing the downtrend started in July 2022. 
• Core inflation, which excludes volatile food and energy goods from the CPI basket, increased 5.5% year-on-year, in line with estimates and slightly below March's 5.6% reading. The monthly increase was 0.4%, also equal to prior month and estimates. 
• Energy continued to be the primary driver to the inflation decline, with the overall category dropping 5.1% on the year, while fuel oil plummeted 20.2%. 
• Food prices remained unchanged on monthly base, and were 7.7% higher than a year ago. 
• Services items continued to add positive contributions to the overall CPI inflation, with shelter rising 0.4% on the month and 8.1% year on year. 

Is Fed Hold In June A Done Deal? 

Prior to the April CPI announcement, the market was heavily tilted toward the Fed keeping rates constant in June, with the CME Group Fedwatch tool assigning 80% probability to this outcome. 

Investors slightly increased bets on a Fed pause in June on Wednesday, with Fed swaps signalling a 86% probability after the CPI report. 

The most recent statistics on the CPI suggest the Fed's aggressive hikes are slowly producing their desidered effect on inflation. The lower-than-expected print in the April CPI might put the Fed on hold in June, although the April labor market data was rather solid, with nonfarm payrolls increasing by 253,000 vs. the predicted 180,000 and the unemployment rate falling to multi-decade lows at 3.5%. 

Market Reactions: Dollar Up, S&P 500 Down

The dollar, as closely tracked by the Invesco DB USD Index Bullish Fund ETF UUP, fell substantially by 0.3% in the minutes following the CPI data, while S&P 500 futures rose 0.5% ahead of the opening bell on Wall Street. The S&P 500 index is tracked by the SPDR S&P 500 ETF Trust SPY.

Treasury yields dropped, with the 10-year yield down 6 basis points to 3.45% and the two-year yield down 8 basis points to 3.95%.

Chart: Price Action On DXY Index, S&P 500 Futures Following April CPI Announcement

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