More and more data indicate a precarious inflation situation in the United States, with a possibility of an uptick. The US Consumer Price Index (CPI) rose for two consecutive months in March, with an annual increase of 3.5%, the highest since September of the previous year. Additionally, the Core Personal Consumption Expenditures (PCE) Price Index for the first quarter, which the Federal Reserve pays more attention to, surged from 2% in the previous quarter to 3.7%, marking the first quarterly growth in a year. The resilience of US inflation surpassing expectations has led the market to reassess the Fed's chances of cutting interest rates this year. However, what is most concerning is that the US first-quarter economic growth decelerated significantly from 3.4% to 1.6%, corresponding to the rebound in inflation. Signs of stagflation risk seem to be emerging, causing considerable headache for Fed officials. 

It has become increasingly difficult to predict when the US will begin cutting interest rates this year, as inflation has not fallen as expected. Many Fed officials have recently changed their tone, suggesting that action may be postponed until after June. The market even doubts whether the US will cut interest rates this year, with some major banks warning that the Fed's next move may be to raise rates. However, following a significant slowdown in first-quarter economic growth, market divergence is expected to increase further. The key question is which aspect the Fed is focusing more on. If inflation is a concern, the timing of rate cuts may need to be delayed, whereas if economic performance is the focus, the Fed may need to reconsider the need for earlier rate cuts to prevent economic slowdown. After all, this year is a presidential election year, and economic performance will have a certain impact on the election results. I believe that a slowdown in growth for one quarter is not enough to prompt the Fed to immediately change its view on economic prospects. Moreover, the unexpected strong growth of 3.4% in the previous quarter, compared to the forecast of 2%, and the recent steady economic data suggest that the Fed may have the patience to observe for a longer period. On the contrary, once the flames of inflation reignite, they may be difficult to contain. Therefore, the Fed is likely to handle monetary policy adjustments cautiously. The US dollar has been declining recently, but there should be support near 105. Additionally, with the eurozone, Canada, and the UK likely to consider rate cuts in mid-year, it is not advisable to be overly pessimistic about the US dollar.

After its policy meeting on April 26, the Bank of Japan announced that it would maintain interest rates and temporarily continue its accommodative monetary policy, but it no longer mentioned purchasing government bonds in roughly the same scale as before. As the Japanese yen has continued to weaken recently, falling below 152 and 155 against the US dollar successively, there has been no sign of intervention from the central bank, with officials only issuing verbal warnings. Today's policy meeting results have still not helped the yen rebound, but the continued depreciation of the yen is believed to gradually narrow the overall benefits to the Japanese economy. Moreover, the yen's depreciation has also brought varying degrees of negative impact on currency rates in other Asian countries. As it approaches the low of 160 against the US dollar seen in 1990, the likelihood of intervention by the central bank increases.

Patrick Law

Chief Operating Officer of Hantec Group