Core CPI Surprise: Market Braces for Potential Rate Hikes Next Week

Three days into the “Silicon Valley crisis”, volatility remains high, and the US Bureau of Labor Statistics released February’s inflation figures. The Consumer Price Index had positive and negative elements, which makes next week’s interest rate decision slightly more difficult to determine. Due to this, more importance may be placed on today’s producer inflation data, which can provide insight into future inflation. 

The monthly Consumer Price Index came in as expected, which was positive for the stock market as it allowed the inflation rate to drop to the lowest since September 2021. The CPI read 0.4%, as expected by traders, and the inflation rate dropped from 6.4% to 6.0%. Both announcements are positive for inflation as it shows a moderate decline. The monthly CPI figures also indicate a yearly inflation rate of 4.8%. An inflation rate of 4.8% is more or less where the federal fund rate is, allowing the federal reserve to stop hiking interest rates.

On the other hand, the Bureau also released some negative news, hence why the Fed’s decision will be difficult. The Core CPI figures, which exclude Food and Energy products, increased by 0.5%. The reading is the highest since September 2022 and higher than the market had expected. Investors should also note that the Federal Open Market Committee is known to monitor the Core figures more than the standard CPI as it does not include the volatility of energy prices. 

EUR/USD

The EUR/USD during yesterday’s trading saw price movements in both directions with strong support and resistance levels. The exchange rate had started the day with an attempted bearish correction back down to 1.06630. However, the Euro again gained momentum and ended the day at the open market price. The US Dollar Index signaled a more substantial decline against the market as a whole vs. the performance against the Euro. The Index this morning again is experiencing price movement in both directions but is trading 0.15% higher than the open price. 

EUR/USD 30-Minute Chart on March 15th

The market is now pricing in a small rate hike by the federal reserve, a slightly stronger outlook than earlier this week. Some economists are pointing towards a 0.50%, while others are claiming the Federal Reserve will keep interest rates untouched. However, the majority are leaning towards a smaller hike of 0.25%. Investors have returned to a possible hike scenario mainly due to the Core CPI figures, which were higher than usual. 

The central bank's decision will strongly impact the prices of stocks, commodities, and the Dollar. Traders will also monitor the Fed's comments on future rate hikes, but the Chairmen will likely state that this will depend on next month's figures. The Federal Reserve is also likely to tighten regulation on small and medium size banks which may be positive for the Dollar and US stocks. Investors will be monitoring the market’s reaction to tighten measures. 

Over the past 24 hours, the Euro has performed relatively well against most competitors. The Euro has increased in value against the Pound, Swiss Franc and Yen. This may be potentially related to the European Central Bank’s rate decision tomorrow afternoon. The ECB has already advised that European Banks follow a more traditional banking system. SVB had been primarily exposed to riskier startup businesses, which is rare in Europe. 

Investors expect the ECB to raise interest rates by 0.50% during tomorrow's rate decision but again point towards further hikes well into spring. However, investors are monitoring whether President Lagarde will be slightly more dovish after this week’s turmoil. 

Today, traders will monitor the Producer Price Index and Core Producer Price Index. The core figures are expected to read 0.4% and the standard PPI 0.3%. If the data is higher, investors may invest in the Dollar as hikes become more certain. Investors will also monitor the Retail Sales figures for February.

Dow Jones

The Dow Jones remains the worst-performing index out of the top US 3 indices. However, the index found buyers during yesterday’s US Session and increased value, as did the SNP500 and NASDAQ. Even though investors took advantage of the discounted price and a potentially softer policy, pressure still remains on the stock market. 

Dow Jones 1-Hour Chart on March 15th

The NASDAQ saw the most robust trend climbing 2.30%, the SNP500 increased by 1.65%, and the Dow Jones rose by 1.06%. However, the bullish price movement of the Dow Jones would have been significantly lower was it not sure of the rebound in banking stocks. For example, JP Morgan and Goldman Sachs were in the top 5 performing stocks for the Dow Jones. 

When looking at technical analysis, we can see clear impulse waves in both directions and forming clear support and resistance levels. A support level formed at $31,793 and a resistance at $32,305. These levels will be critical for technical analysis and can create breakout points. However, traders should be cautious of rebounds after the breakout. 

Newton Investment Management this morning advises Bloomberg that the stock market may see some bullish price movement in the short term but is likely to return to a decline in the medium to longer term. Here again, we can potentially see why resistance levels formed so far this month may be critical. 

Traders should note that today’s economic releases will also affect the US stock market and the Dollar. 

DAX (German 30)

The Silicon Valley crisis has affected US equities and global investor confidence, which can also be seen in Europe. The DAX has been declining since the 7th of March but has increased in value during yesterday’s European Session. The price increased by 1.66% but did not fully correct the decline seen on Monday. 

European Investors will now look at the European Central Bank and their rate decision. An increase in interest rates and a hawkish signal three for the next 3 months can pressure European stocks. The ECB is expected to increase the main refinancing rate to 3.50%, but investors no longer believe the ECB will hike 2% over the next four meetings. 

What is the price indicating? Take a look at our latest technical analysis video for possible signals. 

DAX Technical Analysis Video 

Summary:

• The US Dollar saw mixed price movements, but the Euro managed to edge slightly higher. 
• Inflation declines from 6.4% to 6.0%, but monthly Core CPI data is higher than expected, reading 0.5%.
• Investors again believe the Federal Reserve will choose to hike interest rates but possibly by a lower amount.
• Markets are expecting the ECB to increase the main refinancing rate to 3.50%, but investors no longer believe the ECB will hike 2% over the next four meetings.