The US Consumer Price Index excluding food and energy rose 0.2% month on month in March. The forecast was 0.3%.
The outturn was 0.1 percentage points below expectations. This refers to the core CPI measure, which removes food and energy prices.
Core Cpi Undershoot Signals Earlier Fed Cut
The softer-than-expected core CPI reading of 0.2% for March is a significant dovish signal for us. This directly challenges the narrative that inflation is sticky and increases the likelihood of an earlier Federal Reserve rate cut. In response, market-implied probabilities for a June rate cut, as seen in Fed Funds futures, have jumped from around 40% to over 65% this morning.
We should be looking at positioning for lower interest rates ahead. This involves buying derivatives tied to short-term rates, such as September SOFR futures, to lock in a lower future rate. The sharp drop in the 2-year Treasury yield by 15 basis points to 4.50% following the news strongly supports this trade.
Lower rate expectations are a strong tailwind for equities, especially for growth and technology sectors. We should consider buying near-term call options on the Nasdaq 100 (NDX) to capitalize on a potential relief rally. With the VIX dropping below 14, selling put spreads on the S&P 500 offers a way to collect premium with a defined risk profile.
A more dovish Fed typically weakens the U.S. dollar against other major currencies. We are positioning for this by looking at bullish options strategies on the EUR/USD pair. This dollar weakness also provides support for commodities, making call options on gold futures an attractive hedge against any lingering uncertainty.
Late 2023 Pivot Playbook Back In Focus
This environment feels very similar to the market pivot we saw back in late 2023. At that time, a series of cooling inflation reports led the Fed to signal the end of its hiking cycle, sparking a powerful rally in stocks and bonds. We believe a similar repricing event is now underway.
