Dollar falls on CPI while stocks welcome Tillerson, Kudlow news

After Friday’s soft wage growth figures overshadowed the rather good jobs numbers, the market’s attention quickly turned to this week’s release of key inflation data. Market participants were wondering how the mostly stronger data could influence the Federal Reserve’s interest rate trajectory this year, at a time when other central banks are not really in a hurry to tighten their policies. They were also aware that the Fed’s projected rate hikes for this year were already mostly priced in, and that for this to change they needed to see a significant improvement or disappointment in incoming U.S. data.

Well, as it turned out, today’s inflation data was neither here nor there – it was bang in line with the expectations. The dollar fell across the board as traders responded to news the headline Consumer Price Index (CPI) printed +0.2% month-over-month compared to last month’s +0.5% reading. Meanwhile, core CPI also printed +0.2% after the previous month’s +0.3% reading. On a year-over-year basis, CPI rose to 2.2% from 2.1% last, while core CPI remained unchanged at 1.8%. Again, both core measures of CPI inflation were in line with the expectations.

Tillerson sacked, Kudlow could take Cohn’s job as economic advisor

At the time of the CPI data release, speculation was confirmed by U.S. President Donald Trump that he had sacked Rex Tillerson as his Secretary of State. This follows months of speculation that he would be ousted from the post. Tillerson will be replaced by Mike Pompeo, the CIA director, whose job would be taken by the current deputy director of the CIA, Gina Haspel. Trump also told reporters that he is looking at Larry Kudlow "very strongly" who "has a very good chance" of taking over Gary Cohn's job as his top economic advisor.

Kudlow is a free trade supporter, so his appointment should be good news for stocks and U.S. index futures were climbing higher at the time of this writing. However, it was not clear if the stock market’s positive reaction was in response to the Kudlow news or the CPI data and resulting dollar weakness.  Traders were still trying to digest everything that has happened.

Looking ahead: US PPI, retail sales and Chinese industrial data

Looking ahead, there’s not an awful lot of further top-tier U.S. economic data this week, except the Producer Price Index and Retail Sales, on Wednesday, and Industrial Production on Friday. PPI for February is expected to come in at +0.1% after the previous month’s in-line +0.4% reading, while core PPI, which excludes volatile food and energy prices, is expected to print +0.2% on the month. Thus, the dollar’s next move is likely to be triggered by movements in other currencies. With Chinese industrial production and New Zealand GDP to look forward to on Wednesday, the commodity currency pairs such as Australian dollar/U.S. dollar (AUD/USD) and NZD/USD will be in focus now. On Thursday, meanwhile, we will have an interest rate ‘decision’ to look forward to. The Swiss Nation Bank is widely expected to keep its policy unchanged but it will be interesting to see if the bank will make any new comments over the recent strengthening of the franc.