The current range stands at 4.75% – 5% after the Fed delivered another 25bps hike at their March meeting. Markets had started to lean in favour of that being the last rate hike and therefore the terminal rate, but after last Friday’s jobs data the current pricing is showing a 70% chance of another 25bps hike in May. The fact is that the unemployment rate unexpectedly dipped once again and labour conditions remain tight, something that Powell had hoped would have shown further signs of loosening by now.

As expected, this caused a little bit of concern for equity traders and led to US stocks consolidating sideways at the beginning of this week, further aided by the reduced flows due to the Easter holiday.

But Wednesday brought most of the excitement this week with the March US CPI data release and the FOMC meeting minutes. The first gave a pleasant surprise as year-on-year inflation rose less than expected, coming in at 5% vs 5.2%, and dropping from 6% in February. The release gave a boost to equities and commodities and caused a bit of a tumble in US yields.

That said, core inflation rose slightly from the previous month, which was already anticipated by markets, but nonetheless, it proves that domestic price pressures remain sticky, especially within the services sector. The feeling was further cemented by the fall in producer prices (PPI) released on Thursday, showing that price pressures have eased at the beginning of the production line.

The FOMC meeting minutes failed to reveal any new information, evidencing that some members had weighed stopping rate hikes at the March meeting after the banking rout, but still on track to continue tightening. In fact, Atlanta Fed President Raphael Bostic reiterated this morning that one more quarter-percentage-point interest rate hike can allow the Federal Reserve to end its tightening cycle with some confidence inflation will steadily return to the U.S. central bank’s 2% target.

The recent rally in US indices does seem slightly overextended but the technicals are still supporting a path of least resistance higher. I wouldn’t be surprised if we see some consolidation over the coming days, with the potential for a minor pullback, which would allow for a more healthy and sustained rally.”

By Daniela Hathorn, Senior Market Analyst

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