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Higher Inflation, Higher Rates

On Tuesday the new inflation data for the USA got released. The core and headline CPI came in higher than estimates. This was mainly driven by service category within which the main contributor was Shelter (Rent) and Transportation. In the goods category, it was mainly gasoline fuel prices and food that were due to egg prices.

Post the release the bond yields started to rise as the Fed Rate Swap market adjusted to the CPI release. Though the probability of the next meeting hike by 0.25% remained at 90%. The rest of the year's trajectory changed, including two more rate hikes with a peak rate of 5.25-5.5 and one rate cut by the November meeting.

Though the equity and volatility remained stable since the release it can be due to both category options expiring this week. That is why the movement in equity markets next week becomes more important to watch.

Given the elements of CPI continue to remain at a higher level of inflation, the upside risk to the releases in coming months remains high. This would push the rate trajectory higher as well.

This rate movement along with earning slowdown would make the second half of the year much more difficult as many government and subsidy programs expire especially in Europe.


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