After banking concerns and the fear of its rapid spread to other sectors, some market participants thought Fed might stop its interest rate hikes. Still, this feeling was short-lived, as inflation numbers showed continuing rate hike concerns. Therefore, a 25 basis point rate hike is again most likely predicted.
February CPI numbers showed that the fall was insufficient to convince anyone that the battle with inflation was over. While data were mostly as expected, the Core inflation number was the primary concern. The annual CPI, which is not adjusted seasonally, has slowed down for eight consecutive months and hit a new low since September 2021, reporting 6% in February, down from 6.4% in January. Consumer inflation rose by 0.4% monthly, in line with expectations and lower than January's 0.5% price raise.
However, sub-data showed that price growth slowed in most categories. Among them, used car and truck prices, with -a 13.6% decrease, had the biggest fall. It was also the most significant drop since 1960. Food prices increased by 9.5%, energy prices increased by 5.2%, and new car prices repeated a 5.8% rise in January; housing inflation remained overheated, rising from 7.9% to 8.1%. On the other hand, excluding energy and food prices, the core CPI in February recorded 5.5% annually, down for five consecutive months, and hitting a new low since November 2022, also slightly lower than the previous month of 5.6%. However, on the monthly scale, Core CPI recorded a 0.5% raise, the most significant increase in five months, and slightly higher than market expectations and the previous month of 0.4%.
After Tuesday's consumer inflation worries, today's producer prices lowered the concerns. Core PPI in February was flat and did not change, down from the 0.1% raise in January. PPI also fell by -0.1%, while it was raised by 0.3% in January. In addition, Retail Sales in February fell by -0.4%, more than a -0.3% estimated loss, but much less than a 3.2% rise in January.
The recent banking crisis has led market participants to believe the Fed may pause interest rate hikes this month. However, after releasing the CPI numbers, Fedwatch showed that the 25 bps rate hike probability rose to 69.4% from 65% a day earlier. In contrast, the likelihood of keeping the benchmark interest rate unchanged fell by 35% from a day ago to 30.6%.
In addition, if Fed now overreacts, it may cause a more considerable panic and price fall across the markets. Therefore, a 25 bps rate hike in next week's meeting is the most expected decision from FOMC members. This expected reaction and decision will pressure risky assets, decrease the Bond Yields, and raise the safe-haven demands.