In March, the United States Consumer Price Index excluding food and energy rose by only 0.1%, falling short of expectations of 0.3%. This reflects slower-than-anticipated growth in consumer prices for that month.
The release of this data may influence market behaviour, particularly regarding Federal Reserve policy decisions. The lower-than-expected index can suggest reduced inflationary pressures, impacting interest rate considerations.
Consumer Price Index and Core Inflation
A weaker rise in core inflation for March—just 0.1% compared to the 0.3% forecast—implies diminishing momentum in price gains across non-volatile categories such as housing, apparel, and medical care. This deceleration might, at least temporarily, relieve worries of persistent inflation. When we adjust for volatility from fuel and food prices, which tend to swing sharply due to external shocks, the underlying softness appears clearer. That gives us better insight into the direction of monetary policy over the short term.
Markets immediately shift focus to what this might mean for upcoming Federal Reserve moves. Powell, who has remained firm on a data-dependent approach, will likely view this as support for holding rates steady rather than tightening further. That said, other economic markers—like wage growth and consumer demand—continue to suggest the overall economy is far from stalling.
Trading desks should now be reevaluating positions sensitive to interest rate expectations. Rate futures have already begun pricing in fewer hikes—or earlier cuts—based on this update. If we continue to see inflation readings that soften month over month, we’d expect volatility in short-term bond yields to remain elevated. That could offer more attractive entry levels for options strategies tied to 2- and 5-year notes.
Policy Paths and Economic Indicators
Brewer, who covers macro strategy at a major investment bank, underlined that although one data point doesn’t change policy alone, it adds weight to the argument that the current rate path is closer to its peak. We interpret that as a gap opening up for curve-steepening trades, especially if upcoming employment figures show resilience.
For those with exposure to interest rate derivatives, adjusting gamma risk ahead of the next FOMC meeting is worth consideration. The risk-reward balance in playing for further delays in rate increases has improved, assuming inflation keeps slipping off the highs seen last year.
While recent trends offer hopeful signs, logistics costs, insurance premiums, and inventory pressures still affect downstream prices. It’s not uniform across sectors, which is why we’re avoiding broad assumptions. Instead, the focus should remain on positioning portfolios to benefit from a slow unwinding of inflation bets.
Watch how swap spreads tighten or widen between now and mid-quarter; those movements should hint at whether the broader market starts leaning into this view as well.
