US inflation is making our job difficult!

During the holiday week, while domestic markets are closed, the data flow from overseas markets, and even the recent inflation data released in the US, seem to be pregnant with results that will spoil our mood.

The inflation data for March in the US, announced last Wednesday, exceeded expectations. According to the latest figures, inflation rose by 0.4% on a monthly basis and 3.5% on an annual basis. Expectations, according to polls, were that inflation would be 0.3% on a monthly basis and 3.4% annually. Furthermore, and perhaps most importantly, the core inflation data has exceeded expectations for the third consecutive month. According to market expectations, the core inflation rate, which excludes food and energy prices, was expected to be 0.3% monthly and 3.7% annually. However, both figures exceeded expectations, indicating an increase of 0.4% on a monthly basis and 3.8% annually.

So why does this data matter so much to Türkiye? Although I believe that those who constantly follow my articles are familiar with this issue, let me provide a brief reminder for those who are new to my writings. The value of the US Dollar affects developing economies like ours because the US Dollar has the status of a global reserve currency. Whether we like it or not, the value of the dollar affects the macroeconomic indicators of developing countries. We track this value through the Dollar Index data.

Through the Dollar Index, we can monitor the value of the US Dollar against six different currencies traded most in the world. An increase in the index means an increase in the value of the dollar. The policies affecting this value are determined by the Federal Reserve, the central bank of the US. Fed's interest rate hikes/cuts and balance sheet tightening/expansion affect the Dollar Index and determine its direction.

After providing this brief information, let's take a look at the current situation. At the beginning of this year, the general expectation in the markets was that the Fed would cut the policy rate by 1.5% through a total of 6 rate cuts. However, the data flow in the first two months reduced this expectation to 3 rate cuts. With the March data, the expected number of rate cuts has now dropped to two. I say "for now" because if inflation continues to remain strong, the possibility of the Fed skipping the entire year increases. There are even some commentators suggesting that "the Fed may be forced to raise rates."

Before the latest inflation data was released, swap futures were pointing to September for the first rate cut of the year. However, the possibility of a cut in June was around 53%. Following the higher-than-expected inflation data for March, the probability of a cut in June dropped to 18%. Currently, by looking at swap futures, we observe that the first rate cut is postponed to November. Therefore, it seems that the Dollar Index will remain strong for much longer than our initial estimates.

The strength of the dollar may mean that Türkiye's ongoing monetary and quantitative tightening program in the fight against inflation may last longer than expected. Moreover, a strong dollar, through exchange rate pass-through, may disrupt inflation expectations, so the possibility of additional rate hikes should not be ignored. In summary, the higher-than-expected inflation data in the US affects Türkiye's disinflation program as well.