(Bloomberg) — Stock futures joined bonds in a slide as stronger-than-expected inflation data fueled speculation that the Federal Reserve is in no hurry to cut interest rates.
The S&P 500 index fell more than 1% and the stock market fell in April after the consumer price index highlighted the difficult path policymakers face in getting inflation back to the 2% target. It is expected that the range will expand. The yield on the 10-year Treasury note is nearing 4.5%, a new high for 2024. The Fed swaps factor in just 50 basis points of easing in 2024, which is the equivalent of two rate cuts. The dollar rose against all of the developed world.
The underlying inflation rate in March was higher than expected for the third consecutive month. The so-called core consumer price index, which excludes food and energy costs, rose 0.4% from February. Compared to the same month last year, it increased by 3.8% and remained unchanged from the previous month.
Wall Street reaction to CPI data:
Goldilocks has left the building – inflation is no longer going down and expectations for interest rate cuts will be further down the road.
We think the Fed still has a rate cut bias and is likely to cut rates by 25bps in July or September, but if inflation data remains strong, that could be the only rate cut this year. There is a possibility that
The third consecutive year of better-than-expected CPI may have been the decisive factor in June’s rate cut, but it remains to be seen whether 2024 will be the year of two rate cuts or fewer. .
Another question is whether the stock market will see this as more than just a “bump” in inflation’s path. The sharp move was seen after other CPI surprises reversed in a day or two, but recent volatility may not subside, regardless of any indication from today’s pre-market reaction. there is.
Core CPI is 0.4% and June is excluded from the table. Overall, the numbers strongly challenge the Fed’s assumption that January and February were merely a passing point on the path to normalcy.
You can kiss us goodbye with June’s interest rate cut. There is no improvement here and we are going in the wrong direction.
In recent months, it has become clear that the path to the Fed’s 2% inflation target will be difficult. It is often said that the Fed takes an escalator up and an elevator down when setting interest rates, but this cycle it appears to be taking the stairs down.
The US economy is moving at a fair pace, and a June rate cut is becoming increasingly unlikely, with July or September now being called for. The Fed has a headache, and if other central banks were waiting for the Fed to act, they now have a conundrum.
Interest rate markets need to seriously consider the possibility that rising interest rates will continue through at least the summer, and possibly into the end of the year. The numbers didn’t shake the Fed’s confidence, but they cast a shadow over it.
This is the third strong indicator in a row and means that the story of stalled disinflation is no longer temporary. In fact, even if the inflation rate cools down to a more comfortable level next month, there is likely enough caution now within the Fed that a rate cut in July may not be possible.
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