After a series of hot inflation reports earlier within the yr, markets – and consumers – got a reprieve this week. Inflation, as measured by the Consumer Price Index, was unchanged from the previous month and rose just 3.3% in May from the identical period last yr, based on the Bureau of Labor Statistics. reported on Wednesday. The consensus forecast amongst economists was for a monthly increase of 0.1 percent and an annual increase of three.4 percent.
“This was clearly a good report, a delicious appetizer while we wait for the main course later in the day,” said Olu Sonola, head of U.S. economic research at Fitch Ratings, Assets by email in reference to the highly anticipated press conference by Federal Reserve Chairman Jerome Powell following the Federal Open Market Committee meeting on Wednesday afternoon.
Core inflation, which excludes the more volatile food and energy prices, also fell wanting economists’ expectations in May, rising 0.2% month-on-month (the bottom since September 2021) and three.4% year-on-year, compared with forecasts of 0.3% and three.5%, respectively. The major aspects contributing to inflation last month included housing costs, which rose 0.4% in May and 5.4% year-on-year, food prices, which rose 0.1% in May and a couple of.1% year-on-year, and auto insurance, which fell 0.1% in May but was still up greater than 20% year-on-year. Meanwhile, gasoline and airfare, which fell 3.5% and three.6% year-on-year, respectively, pulled inflation in the opposite direction.
On Wall Street, the lower-than-expected inflation report was an instantaneous cause for celebration, particularly its implications for Federal Reserve policy. Both the S&P 500 and the tech-heavy Nasdaq were up greater than 1 percent by Wednesday morning, while the Dow Jones Industrial Average was up 0.6 percent. The yield on 10-year U.S. Treasury notes also fell 0.1 percent to around 2.3 percent, suggesting bond investors expect rates to fall.
“Wednesday’s weaker-than-expected consumer price index will allow the Fed to begin cutting interest rates as early as September,” said Skyler Weinand, chief investment officer at registered investment advisor Regan Capital. Assets by email. “After the worrying rise in inflation earlier this year, we have now seen several encouraging inflation readings.”
Ever because the Federal Reserve began raising rates of interest to combat inflation in March 2022, effectively raising borrowing costs for businesses across the country, stock market investors have been waiting for a change in policy. At the beginning of the yr, lots of Wall Street’s top forecasters expected just that in 2024, anticipating as many as six rate cuts. But those hopes were dashed after three hot inflation reports spooked the Fed this spring.
Now, nevertheless, some imagine the most recent inflation report may finally provide Fed Chairman Powell and his colleagues with enough evidence to start their market- and economy-boosting rate-cutting cycle. The likelihood of a July rate cut continues to be slim, but as Weinand said, September is a favourite.
According to CMEs’ FedWatch tool, which tracks Fed futures contracts, the bond market now sees a couple of 70 percent probability of a rate cut in September, greater than making up for the drop to 50 percent seen just last week after the Hot Jobs report.
Still, not everyone seems to be convinced that rate cuts are actually a certainty. Ashwin Alankar, head of world asset allocation at Janus Henderson Investors, said that while the CPI report will allow the Fed to think about a “precautionary cut” later this yr, Chair Powell and his team still have their reputations to defend and don’t need to lose the battle against inflation after years of labor. That will likely prompt Powell to persist with the data-dependent, wait-and-see mode at his press conference following the Federal Open Market Committee meeting on Wednesday afternoon.
“At this stage, there is no greater goal than the Fed’s credibility to keep inflation expectations anchored, economic activity robust and financial markets friendly,” Alankar said Assets by email. “Until there are clearer signs of disinflation in breadth and depth, today’s weakness argues more for a preemptive rate cut than for a shift in Fed policy toward looser monetary policy.”
Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management, echoed Alankar’s comments, warning that the Fed needs greater than a cool inflation report back to cut rates. “However, cooling inflation remains a challenge against the backdrop of summer heat. Let’s see what the Fed forecasts this afternoon. That’s good news, but we’re going to need more of it,” she said. Assets by email.
