Will March Rate Hike Be 50bp...? Market Preempts US CPI Release

[Asia Economy Reporter Hwang Yoon-joo] The outlook that the U.S. Federal Reserve (Fed) will pursue an aggressive tightening policy has become a foregone conclusion following inflation indicators exceeding expectations.

Park Min-young, a researcher at Shinhan Financial Investment, stated, "The market quickly priced in a 50bp hike in March and 6 to 7 hikes annually after confirming the January consumer price index."

Earlier, the U.S. Department of Labor announced that the January Consumer Price Index (CPI) rose 0.6% month-over-month on a seasonally adjusted basis and surged 7.5% year-over-year. This exceeds the expert forecasts compiled by The Wall Street Journal, which anticipated increases of 0.4% month-over-month and 7.2% year-over-year. The 7.5% year-over-year inflation rate in January is the highest since February 1982, and the inflation rate exceeding 6% has continued for four consecutive months.

Following the release of the data, the yield on the 2-year U.S. Treasury note jumped about 25bp, and the 10-year yield rose about 10bp. The 10-year yield surpassed the 2% big figure, intensifying volatility in the global financial markets. This is the first time since July 2019.

Researcher Park commented, "The subsequent statement by James Bullard, President of the St. Louis Fed, advocating a 100bp hike by early July expanded the rise in interest rates," adding, "The probability of a 50bp hike at the March FOMC meeting priced into federal funds futures surged from 25% to nearly 100%." Currently, market interest rate levels significantly diverge from Fed officials' forecasts, but based on the Fed's data dependency, the market is preemptively pricing in a 50bp rate hike starting in March.

Park analyzed, "U.S. inflation is still likely to peak within the first quarter and then show a slowing trend," adding, "Assuming a 0.5% month-over-month increase going forward, the January data represents the peak, with declines starting from February."

He stated, "If assuming 0.6%, the peak will be in February; if 0.8%, the peak will be in March, followed by a downward trend," and added, "Inflationary pressure is expected to ease starting from the supply side."

Researcher Park forecasted that the supply bottlenecks driving inflation will be resolved.

He explained, "The Maersk Group, which accounts for about 20% of global maritime cargo volume, announced strong results in 2021 and projected that supply chain disruptions would rapidly ease from the second half of 2022," adding, "Given that vehicle prices currently contribute the most to U.S. consumer price inflation among individual items, the easing of logistics difficulties can be expected to slow inflation."

He added, "However, overall upward inflationary factors such as raw material price uncertainties and wage increases remain dominant."

This content was produced with the assistance of AI translation services.