CPI now: How to trade the latest CPI figures

The Fed’s March CPI release has been hyping all day on financial media, and every smart trader has been preparing to react to the latest data. Let's brush through how the latest CPI report will affect markets in the coming days and weeks. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is the most widely used measure of inflation, closely followed by policymakers, financial markets, businesses, and consumers.

The CPI consists of a bundle of commonly purchased goods and services and measures the changes in the purchasing power of a country’s currency.

• CPI level changes. When a CPI announcement shows significant change, the domino effect begins, moving through stocks and indices, interest rates, inflationary levels, and USD prices.
• CPI expectations. What were the expectations? The forecasts changed a few times, but prices were overall expected to rise 0.4% month-over-month (MOM)  from February 2023, at a pace of 5.2% annually (YoY). But how is that valuable for you? The assumption, when the CPI release is below expectations, it could mean that inflation is not as high as expected. This could lead to a decrease in interest rates and a boost to the stock market and national confidence. A positive report will keep the markets fluid, and even prompt spending — the lifeblood of the economy.
• CPI reality. March, core CPI rose 5.6% year-on-year. Core CPI, which excludes volatile food and energy prices, rose 0.4% month-over-month, in line with the 0.4% expected, and down from +0.5% in February. Whenever the CPI release is above expectations, it could mean that inflation is higher than expected. This could lead to an increase in interest rates,  a decrease in the stock market, and a tumble for USD. That's why the release is so anticipated but traders and economists alike.  A 0.4% increase in CPI means that the cost of this basket of goods and services has gone up by that percentage. So what’s coming?
• Inflation. The rise in the CPI indicates inflationary pressure, which means the general level of prices in the economy is increasing. If this trend continues, expect a decrease in the purchasing power of money, as goods and services become more expensive. Higher interest rates and lower bond prices may be on the horizon.
• Monetary policy. The Federal Reserve (Fed) will likely rise inflation by increasing interest rates to slow down economic activity and reduce demand for goods and services. This usually leads to a decrease in consumer spending and investment and a negative impact on economic growth.
• Stock market volatility. Investors will consider the news of rising inflation as a signal to sell off their stocks, which could lead to stock market volatility. A negative impact on investor confidence always threatens the overall stability of the financial markets.
• Debt burden. A rise in inflation typically increases the cost of borrowing, making it harder for borrowers to service their debt, which leads to defaults and bankruptcies, and that default flows up the banking sector hierarchy.

The bottom line

So following the release of the CPI today, what we're seeing is what economists anticipated. Gasoline prices are down 4.6%, and natural gas prices, now that the winter is over, down 7.1%. We also see enthusiasm in equity market futures with a three-quarters of 1% boost on the S&P 500, after being virtually unchanged for some time. Core inflation is down from the month before, a lot softer than the previous month, and a surprise relative to expectations. 

If you look at the last three months, the core rate was up 0.4% and if you look at the last three months, you're still running an annualized rate of close to 5%. The good news is that the rent component should continue to put downward pressure on inflation, but we're still a long way from the 2% figure everyone is calling “safe.” The Fed clearly wants to price out the potential for further rate hikes, and possibly a rate-cutting cycle to start in the second half of the year.

The overall message coming from the Fed is that the US economy is not facing greater struggles and that all is well in the bond and stock markets. That might be true, but it could also be a nation desperately trying to avoid a bank run of USD bonds and securities. We will also know the answer to that soon enough.

So how should you trade? Cautiously, definitely cautiously. The CPI didn’t have a magic spell that will fix the Fed’s underlying weaknesses, nor did it confirm a crumbling economy. Stocks may rise in the coming days, but be tight with a stop loss. If the support drops, prices could tank fast.

In summary, a rise in the CPI by 0.4% may lead to inflationary pressure, changes in monetary policy, stock market volatility, and increased debt burden. If you trade anything related to USD, then take into account fundamental and geo-political influences with greater weight than what the charts say. Stay informed with Exness, and trade with a big-picture mind.