US CPI inflation forecast to have eased a bit in April
US Dollar might benefit from a strong inflation print but stocks could suffer
The April CPI report will be released on Wednesday 12:30 GMT
Traders need to prep for the April US CPI report, which is almost upon us, dropping on Wednesday in New York, ahead of Thursday’s open on the ASX.
Or maybe equity traders are just content to stand pat now the bar for the Fed to resume rate hikes is looking rather high – even though this thinking also accepts that rate cuts won’t be filling the void that is this life anytime really soon.
Well, let me just say this: everyone’s going to suddenly be a lot more worried if this week’s US inflation data even hints that rate cuts may in fact not be needed at all this year, and then suddenly 2025 is on the table too.
Base metal prices climbed on Monday
Copper futures jumped 2.4% on largely expectations of strong demand growth and hopes for some snappy cuts to US interest rates. That’s what’s encouraged investors to pile into the market.
Overnight, a survey of US consumer inflation expectations for the year ahead, lurched upward to 3.3% in April, the highest since November, (and up from 3.0% in March and stronger than the 3.1% expected).
But, I wouldn’t put too much currency into that. I mean, the day we rely on the US consumer to… (trails off.)
Barclays Bank Research has US CPI headline and core inflation in April showing “limited progress toward 2%”.
“We expect US headline CPI to have risen 0.39% m-o-m in April (from 0.38% in March), taking the annual rate lower, to 3.4% y-o-y (from 3.5%).
“Core CPI is projected at 0.34% m-o-m and 3.7% y-o-y(from 0.36% and 3.8% in March), driven by an easing in services prices”.
We actually asked an expert
According to XM Australia CEO Peter McGuire, some of that lovely, aggressive deceleration in US inflation enjoyed during 2022 has paused over the past few months, with inflation proving stickier than the cover of a Rolling Stones classic.
As a result, the market is now expecting just 42bps of monetary policy easing by the Fed during 2024 with the CPI dataset continuing to have a significant market impact.
Stockhead asked Peter how all of this might play out, and here’s what he had to say…
SH: Pete, thanks for meeting us in this superb, but for privacy reasons, unnamed Sydney beach
PMcG: Did you say something? I can’t hear you over these thundering waves at Wedding Cake!
SH: I’ll leave that left hand one for you…
PMcG: I’ll take it. (PMcG smashes the wave, just in time to start answering a string of hurried text messages from shore)
SH: Pete, What’s happened since the March US CPI report?
PMcG: Last month, both the headline and core CPI components for March managed to surprise the market by printing above expectations.
The US dollar enjoyed a boost across the board, but US stocks suffered as the probability of a June rate cut by the Fed dropped aggressively.
Since then, the data flow has been mostly on the weak side. Except for retail sales, the economy appears to be slowing down as made evident by the various business surveys, the preliminary GDP print of the first quarter of 2024 and so on…
SH: But there’s also been other US inflation indicators – am thinking of last week’s labour market report – which point to continued price pressures.
PMcG: This is the main reason why the May 1 Fed meeting was relatively balanced. Fed members understand the need for patience as the economy progresses. Cutting rates at this juncture might further fuel the strong domestic demand, partly responsible for the current inflation stickiness, and cause a heated reaction from the Republican Presidential candidate.
SH: So what do they expect for Wednesday?
PMcG: The market is expecting a small deceleration across the board as the headline figure is seen rising by 3.4% year-on-year with the core indicator, which excludes food and energy prices, edging lower to 3.6% yoy.
With both the food and energy price pressures remaining weak, the focus will be on shelter.
Considering this sector’s weight to the overall CPI figure, a further deceleration in shelter costs appears vital to open the door to Fed rate cuts.
House prices turned the corner about a year ago and are currently recording steady yearly growth. Assuming that there’s a 12-18 month lag between house prices and shelter costs, there is an increasing possibility of the latter continuing its recent slowdown.
SH: How will the Fed react to the CPI report?
PMcG: There’s two inflation reports until the June 12 Fed meeting. The market’s currently assigning only a 5% probability for a June rate cut with this percentage rising considerably for the September meeting. This market pricing matches the updated Fed expectations by certain key investment houses looking for just two rate cuts in 2024.
Considering the multiple Fed members’ appearances arranged for this week, one should expect a plethora of commentary on the inflation report.
Eh, rather conveniently, one of the arch hawks of the FOMC, Minneapolis President Kashkari, will be on the wires on Wednesday. He will most likely remain hawkish if CPI does not significantly surprise on the downside.
SH: Significant market reaction if the CPI forecasts aren’t met?
PMcG: Should both the headline and core subcomponent surprise again to the upside, US equities stand to suffer, especially if retail sales released also on Wednesday point to an undying spending thirst from US consumers.
The US April CPI report will be released on Wednesday 12:30 GMT.
The post Fright Night: How will markets cope with Wednesday’s blockbuster US inflation read? appeared first on Stockhead.
