Upside Inflation Surprises Surge

Some risky assets ignored today’s upside inflation surprise in the U.S. There is a talk of U.S. inflation peaking – will EM inflation follow suit?

U.S. Inflation and Rate Hikes

Today’s global inflation data dump consisted mostly of upside surprises, starting with the U.S., where annual headline inflation accelerated to 8.5%. However, because the surprise was small (sequential inflation of “mere” 0.3%), and core inflation was a tad lower than expected, the U.S. Treasury curve actually rallied after the release. The print should justify a 50bps rate hike in May (which is fully priced in by now), but there is a lot of talk this morning about inflation peaking in March, and Fed Funds Futures are pricing in a relatively short hiking cycle (until Summer of 2023, see chart below).

Room for More Rate Hikes in Brazil

It is not just Treasuries that liked today’s inflation outcome in the U.S. Some risky assets, like the Brazilian real and the South African rand, staged a nice post-release rally. The Brazilian central bank’s proactive rate hikes helped to create a sizable policy cushion for the currency (Brazil’s real policy rate adjusted by expected inflation is one of the highest in emerging markets (EM)). Governor Roberto Campos Neto said yesterday he was surprised by the latest inflation data and that the central bank is analyzing the numbers to see whether they change the current projections. The local swap curve added some extra tightening for rate-setting meetings in May and June, with a 100bps + 50bps combo now firmly priced in.   

Inflation and Pro-Growth Policies

Staying in LATAM, Chile’s inflation exceeded expectations by a wide margin in March (surging to 9.4% year-on-year), which is why it is important to keep an eye on the push to allow the 5^thpension funds’ withdrawal. Minister of Finance Mario Marcel cautioned that the sizable withdrawal (approximately 5% of GDP) can add up to 5% to annual inflation. In Asia, India’s inflation momentum is also getting stronger – headline inflation accelerated more than expected to 6.95% year-on-year. The central bank kept its policy rate on hold this month – albeit it did some stealth tightening by raising the floor of its interest rate corridor. However, with inflation moving further away from the target (4±2%), it would be next to impossible to avoid a rate hike in June. Stay tuned!

Chart at a Glance: Higher Terminal U.S. Rate Expectations, But Relatively Short Cycle

Source: Bloomberg LP