After a quiet start to the new week, the reaction to the US CPI data yesterday was certainly a banger. The dollar crumbled while stocks rallied hard, with the latter reaffirming the technical breakout from the end of last week. Meanwhile, bonds also rallied strongly and it is pretty much a reversal of fortunes for the greenback. It was now a case of sell the dollar, buy everything else.

As the dust settles, it begs the question: How did the US CPI data impact the Fed outlook? Let's take a look.

Fed funds futures curve

As you can see, there is a dramatic shift going into next year and traders are now even more convinced of a rate cut coming around the middle of 2024. That thinking now sees the first rate cut brought forward to June instead when it was previously in July before the US CPI data.

While the data yesterday reaffirms the the downtrend in inflation remains intact, we're still talking 4% core inflation mind you. And we're still seeing monthly increases in the likes of rent, shelter, and food prices. So, to say that we're destined to hit 2% inflation in the near future might still be misguided.

But we have to go based on what the market is telling us and there is no use fighting that. For now, the market believes that the Fed is done and there is no likely further threat of rate hikes. And that's what traders are working with at the moment.