Yet again it seems that market expectations have been dashed with the March US CPI inflation data coming in at 3.5% compared to expectations of 3.4% year-on-year.
The data are likely to make life harder for the US Federal Reserve and expectations of that first all important interest rate cut which has been widely hoped would happen in June. Does today’s inflation print jeopardise this and does it mean that the Fed is running out of reasons to actually make the cut?
Investment strategists have been sharing their reaction to this latest US inflation data as follows:
Commenting on the latest data, Tiffany Wilding, Economist at PIMCO said:
“The U.S. reported the U.S. consumer price index (CPI) rose 0.36% in March, slightly hotter than forecast. Some details, however, looked firmer than what was implied by the headline number. Under the surface, used car prices fell more than expected, yet core services ex-shelter accelerated, driven by a jump in auto insurance inflation. This was enough push up the trailing 3-month annualized change to over 8% – a level that is well above the Federal Reserve’s 2% target.
“In terms of the near-term outlook, we suspect auto insurance inflation will moderate somewhat next month, but overall, super core inflation (services ex-shelter) measures are likely to remain firm, absent further easing in labor markets. Taking a step back, the problem for the Fed is that core goods deflation has troughed, while services inflation is proving sticky. As a result, we nudged up our forecast and now are projecting the year-over-year rate of core CPI to end 2024 at 3.5%, or a bit above, versus our previous expectation for a 3-3.5% range.
“This report, in addition to the jobs report released last week, complicates the timing of the Fed’s rate cuts. With this latest data, there is a strong case to push out the timing of the first cut past mid-year and it further strengthens our Cyclical Outlook that called for the U.S. central bank to ease monetary policy at a more gradual rate than its counterparts in developed market economies.”
Also commenting, Nathaniel Casey, Investment Strategist at Evelyn Partners, said: “March’s inflation report came in slightly above forecasters expectations with headline CPI re-accelerating slightly to 3.5%. However, core inflation remained unchanged, with today’s figure of 3.8%. Base effects proved a slight headwind to today’s release with March 2023’s headline monthly print of 0.1% falling out of the annual comparison. However, these base effects become more favourable next month and could help to reverse some of March’s acceleration in the annual inflation rate.
“The index for shelter continued to remain resilient rising by 0.4% on the month. However, on an annual basis shelter inflation has slowed to 5.7% from its peak of 8.2% in March 2023. The monthly index for energy remained positive for the second consecutive month, having been falling for the previous four months as rising oil prices fed through to gasoline. However, on an annual basis energy inflation is running at an acceptable 2.1%.
“There was some encouragement for households in the data, when it came to food prices, with the index increasing on the month by just 0.1%. On an annual basis the food inflation basket is now running at just 2.2%. Additionally, core goods shrank by 0.2% on the month, with both used and new cars driving this deceleration.
“Turning to the labour market, March’s non-farm payroll figure of 303k looks solid when compared to the 10-year average of ~180k, taken from up to the end of 2019 before the pandemic distorted the data. Other measures of hiring outside of the payroll report also corroborate a healthy labour market. For instance, the latest February job openings (from the JOLTS survey) reported earlier this week came in at 8.8m, down from a peak of 12.0m in March 2022, but it is still significantly up from a pre-covid level of around 7.0m at the end of 2019. Essentially, the demand for available workers (employed plus job openings) is running around 2m higher than the supply of workers (employed plus unemployed). This labour supply gap supports wage growth which is currently growing at an annual rate of 4.1%. The risk is that while wage growth remains strong, the US economic resilience we’ve seen over the last year will continue, making it more challenging to return inflation back to the Fed’s 2% target.
“Market interest rate expectations have moved substantially over the last three months. At the start of the year, futures markets anticipated the Fed would start cutting rates in March and make at least six 25 basis point rate cuts this year. Since then, optimism has been reined in, with markets now expecting the base rate to end 2024 at 4.85% with the first of these cuts now expected to materialise in July. This means markets are now pricing in less rate cuts than the Federal Open Market Committee who forecasted three cuts for 2024.
“Immediately following the report US equity futures gained fell 1% while 10-year treasury yields rose 15 basis points.”
Casey goes on to talk about the bottom line – and what it might mean for interest rate cuts saying: “Although today’s inflation report was slightly warmer than expected, it is unlikely hot enough to warrant the FOMC to shift away from cutting rates later this year, which markets currently expect to start occurring during the summer. However, as recent inflation prints have pointed to a slowing path back to the Fed’s target of 2% we could see fewer rate cuts this year than the three currently forecasted by the FOMC at their latest meeting.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said: “US inflation comes in hotter than expected for the third consecutive month, which killed off the chance of a rate cut in June. This is a highly consequential inflation report given that we have seen a string of stronger than expected data from the US in recent weeks and markets were already unsure whether the Federal Reserve can ease policy as guided. Headline core (ex-food and energy) and super-core (services ex-housing) inflation came in at a pace that will probably make the Federal Reserve feel uneasy. Although inflation is moving in the right direction, the market is losing patience on the path to the destination. Markets have now pushed back the timing of the first rate cut to September and expect only two cuts this year rather than three. Bond and equity markets are likely to react negatively to this report.”
Richard Flynn, Managing Director at Charles Schwab UK, said: “Today’s figures show that the rate of inflation has increased compared to last month. Every piece of economic data is now being placed under the microscope as the market tries to predict when monetary policy will change, but these figures are unlikely to cause a shift. In recent months it has become clear that the journey to the Fed’s target of 2% inflation will be bumpy and Central Bankers are proceeding with caution when it comes to rate changes. It’s often said that the Fed takes the escalator up and the elevator down when setting rates, but for the path downwards in this cycle, it looks like they will opt for the stairs.”
Max McKechnie, Global Market Strategist at J.P. Morgan Asset Management (JPMAM): comments: “After an uncomfortable few months, today’s inflation print further turns up the heat on the Fed. The change of tone that started at the Fed’s December meeting has already delivered noticeable easing. Financial conditions have loosened significantly year-to-date as credit spreads tightened, equities rallied, and mortgage rates fell in anticipation of rate cuts ahead. Pressure on Powell to match words with actions has been building.”
“The hope going into today’s release was that January and February’s hotter prints would be confirmed as seasonal noise rather than the start of a new trend. Unfortunately, disinflation continues to elude core services as strength in shelter inflation and resurgent medical costs conspired to hold the rate of price increases firm.”
“This release doesn’t in our view mean the Fed cannot cut rates in the summer. The Fed can point to the ongoing normalisation of the labour market as well as the recent small business survey to justify its expectation that disinflation will reassert itself over 2024. But with both growth and inflation remaining firm it’s clear that rate cuts will be modest in overall magnitude.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“Today’s eagerly awaited CPI data release has revealed yet another unwelcome uptick in headline inflation, which will fuel further speculation around the timing of a Fed rate cut. Inflation increased by 0.4% in March and on a 12-month basis rose to 3.5%, up from 3.2% last month and higher than market expectations. This increase was driven primarily by an increase in energy prices and shelter costs.
“These monthly readings will have dashed any remaining hopes of a Fed rate cut as early as May, as yearly CPI still sits firmly above the FOMC’s 2% target and has been heading in the wrong direction for the past few months. There had been hopes that today’s report would show the hot CPI figures from January and February were anomalous, but while that has not been the case, this recent uptick in inflation could just be a bump and we could see it begin to lower once more in the coming months.
“Central bank officials will be keeping a very close eye on these figures, and today’s print will have done little to quell fears that inflation is proving too stubborn. Markets are still hoping for a rate cut this summer, but the Fed will be looking for consistent signs of disinflation in the coming months before making the call.”
