Our Take on the Latest CPI Data

Coming into this morning's February Consumer Price Index report, fed funds futures were pricing in a 73% chance of 25-basis-point rate hike next week and a 23% chance of no action by the Fed. With that stage set, the February Consumer Price Index gives ample reason to think the Fed is not going to back off when it comes to further rate increases.

The reason, as we see in the report's data, is that core inflation, which excludes food and energy prices, remains extremely sticky. For February that line item came in at +5.5% year over year, down a smidge from January's 5.6% figure and December's 5.7%. The Fed isn't going to like the 0.5% month-over-month increase in this closely watched inflation indicator given it was up from 0.4% the prior month and the 0.2%-0.3% increases posted in November and December.

The headline Consumer Price Index for February came in at +6.0% year over year, matching the consensus forecast, and was down from January's 6.4% reading. This continues the steady month-over-month declines in the year-over-year comparisons since the data peaked at +9.1% last June. Despite that progress, the headline figure remains quite a distance from the Fed's 2% target, with the same also being true for core CPI.

The initial reaction of the CME FedWatch Tool puts the likelihood of a 25-basis- point rate hike next week at more than 89%, with the prospect of the Fed doing nothing falling to less than 11%. The indicator also points to another 25-basis-point rate hike at the Fed's May monetary policy meeting, but it continues to show a 25-basis-point rate cut following the Fed's June meeting, with another such cut at its July meeting. Given the data we discussed above, especially for the core CPI reading for February, as of now we put the odds of that rate cut scenario playing out as rather low.

We'll continue to monitor the CME FedWatch Tool throughout today and again tomorrow following the February Producer Price Index (PPI) report. Equity futures still point to a positive open but not quite as robust as they did before the CPI report. Some of that gain is fueled by a rally in bank stocks, as evidenced by the almost 6% pre-market increase in the SPDR S&P Bank ETF (KBE) , but even that isn't as strong as it was ahead of the CPI report.

Remember, there are no Fed heads making the rounds as the central bank is in its pre-Fed meeting blackout period. This means the data will be driving the market mood, and that is likely to keep us on the bench until we have examined tomorrow's PPI report and assessed its implications.

At the time of publication, Action Alerts PLUS had no positions in the stocks mentioned.