It wasn't as if nothing had preempted this - even central banks have been beating the gongs, as they collectively launched their most aggressive monetary policy offensive to combat the coldest deflationary ice age in a long while.
But when it comes to the cleanest dirty shirt in the G7, the US economy has not been spared either. America officially caught the deflationary cold after CPI numbers form January released Thursday showed that prices fell 0.1% compared to January last year, and contracted 0.7% from December last year. The -0.1% YoY figure was inline with expectations, but the sequential change was 0.1% lower than the -0.6% consensus, coming in at -0.7%. January's -0.1% comes on the heels of December's 0.8%, making this an extremely vicious negative change. The good news was that the markets had wised up to reality by discounting this very scenario.
The decline in broad prices as defended by the CPI basket was mostly attributed to fall in energy prices; at the pump and through lower utility bills.
With the significance of this being the first deflationary headline figure 6 years after Lehman collapsed, low oil prices have conveniently been cast as the straw man. There is some truth to this - the energy index fell 9.7% while the gasoline index fell 18.7% in January, both over December. This marks the fiercest plunge in the 7 consecutive negative prints; the report also noted that the decline in the gasoline was "overwhelmingly the cause" for broad weakness in overall prices. When annualized, the energy index and gasoline index fell 19.6% and 35.4% respectively. Staggering figures!
As the report also noted, the fall in prices was not limited to the energy component. The food index was unchanged from December, while the "food at home" index as at the lowest level since March 2013.
The core CPI figure (price excluding food and energy) rose 0.2% in January, beating estimates of a 0.1% increase. Over the last 12 months, the core index was unchanged form December at 1.6%. This was perhaps the only saving grace from the otherwise cryogenic report.
Market reaction was swift. The dollar was immediately bid while equities and treasuries were sold as liquidity was sought. Along with many other market participants, we were perplexed at the strength of the dollar given how the stage was already set for the Fed's ZIRP to persist further into 2015; this was made obviously when Yellen testified on Tuesday saying the central bank wasn't going to hike rates in the next few policy meetings. Even excluding weak energy prices, core inflation of 1.6% still lies short of the mandated 2% target. One really has to wonder why the dollar was bid so hard given the weak US macro data set that hit the wires this week.
But as we have said, the markets will continue to do what it has been doing as long as the music continues... Until it stops, and you really don't want to be in the wrong side when that happens.