Will FOMC Mins, US CPI Signal No Fed Hikes?

After Friday's knockout jobs report amid higher inflation, investors had lost hope that the FOMC would ease this year, but the US-Iran ceasefire is pointing to lower Fed rates.

The Upcoming Market-Moving Events

● Markets will focus on the FOMC minutes to see if the Fed is willing to "look through" the initial inflationary impact of the oil supply crunch.

● Strong labour market data could be coupled with a bump higher in US CPI to raise the odds of a rate hike this year.

● US Core March CPI is expected to tick up to 2.6%, with the odds of the Fed holding rates unchanged for the rest of the year at 80%.

Data Says No to Cutting On Friday, the BLS announced a huge beat on NFP and a drop in the US unemployment rate to 4.3%. The good news was a bit tempered by a drop in the labour force participation rate and a downward revision to February's jobs numbers. The market reaction was nil because US markets were closed for the holidays, and by the time US markets reopened, the focus was back on the Middle East. Markets now see a 53% chance the Fed will hold rates unchanged from 75% through December, a dovish shift in sentiment as investors hope energy inflation will be transitory, especially after the US and Iran agreed to a 2-week ceasefire. Meanwhile, gold prices bumped higher on Wednesday as the dollar weakened amid a surge in risk appetite.

The upcoming data releases could provide some clarity and shift those odds after the FOMC took a wait-and-see stance at the last meeting amid uncertainty around the effects of the war in the Middle East. Adding to the jobs report that showed the war has not negatively impacted hiring in the US is the upcoming March CPI data. Headline consumer prices are expected to have jumped 3.1% in March, compared to 2.4% in February, largely due to higher energy prices. The core rate, however, is expected to stay above the Fed's 2.0% target, ticking up to 2.6% from 2.5% prior. The Fed's preferred inflation measure, core PCE, will also come out this Thursday, but it's for February, and the market is likely to look past it.

What Will the Fed Do? While gold prices are likely to react to the situation in the Middle East, it also depends on the evolution of the Fed's interest rate outlook. Traders will comb through the detailed commentary from Fed officials on Wednesday to get a better sense of the predominant concern. Doves pointed to weakness in the labour market as a reason to cut rates even though inflation was above target. But March NFP data made that case significantly harder.

Since the supply shock from oil prices is expected to affect headline inflation but not core prices if the war doesn't last too long, the Fed could choose to "look past" the inflation shock. That's likely to be the focus for many traders as they review the Fed's minutes to see