The US inflation report highlighted a slight cooling of pricessubstantially in line with analysts’ expectations. The possibility of a Fed rate cut in September is consolidating, although much will depend on the next data, as reiterated by President Powell, starting from the PCE core of May 31st. Meanwhile, retail sales fall short of expectations.
Inflation falling to 3.4% and core data to 3.6%
In April the US consumer price index reported an increase of 0.3% compared to March, compared to the 0.4% expected by economists and the previous survey. On an annual basis, inflation slowed from 3.5% to 3.4%, in line with expectations.
The Core CPI, calculated net of the most volatile components of inflation (food and energy prices), shows an increase of 0.3% on a monthly basis, in line with estimates, after 0.4% in the previous month. The growth compared to April 2023 is equal to 3.6%, consistent with the consensus, after the 3.8% recorded in March every year.
Fed cautious, Powell cautious about rate cuts
Today’s report on consumer prices is unlikely to significantly shift the outlook for the Federal Reserve’s key rates. To further outline the possible decisions of the American central bank for the next meetings, starting from the meeting of 11-12 June, will also be the data on the PCE core of May 31st and the next CPI inflation reportcoming out on June 12th. Any very weak readings, with a noticeable cooling in prices, could increase the chances for a reduction in financing costs at the July or, more likely, September meetings.
Yesterday Jerome Powell, president of the Fed, reiterated that the latest inflation data did not show sufficient progress and that rates will still have to remain at restrictive levels. So far the price data has been “higher than some expected”. Therefore, “We will have to be patient and let restrictive policy do its job”he concluded.
Previously, the chairman had suggested two possible scenarios which could facilitate a early rate cut: one moderation of inflation towards the 2% target, regardless of job marketor an unexpected event weakening of the latter. The latest data on employment in the US have reinvigorated hopes of a lowering of the cost of money in September, but much will depend on the price reports due out in the coming weeks.
Focus on the PCE core of May 31st
The focus then shifts to PCe core deflatorthe inflation indicator preferred by the Fed for its monetary policy decisions, to be released on May 31st. The latest reading stood at 2.8%, higher than forecast.
In recent days, Bloomberg analysts have raised the hypothesis that the index may still show a robust reading, despite the drop in the core CPI that emerged today. This is because the core PCE and the so-called “supercore” index (which also excludes the housing component) include in the calculation the prices for meals consumed outside the home, removed from the core CPI, which will be affected by some wage increases in the sector. On the other hand, the stock market correction in April should reverberate on the financial services component of the core PCE, which have a weight of more than 7%.
The markets’ reaction to US inflation
After the release of the inflation report, i markets continue to bet on 1-2 rate cuts in 2024. The expected overall easing by the Fed is currently 47 basis points.
A move in the June and July meetings is essentially out of the question, while the probability of easing in the next meeting, in September, they reach 90%.
Following the report, i futures on the main Wall Street indices accelerated upwards. Derivatives on the S&P 500 and Nasdaq advanced by approximately half a percentage point, compared to the previous flat trend. THE 10-year Treasury yields they stand at 4.38% and those of the two-year ones at 4.75%, both down about 6 bp and down from before the report was announced. The euro/dollar exchange rate rises to 1.085 and the dollar/yen depreciates slightly to 155.3.
Yesterday producer prices, today retail sales
Today’s data comes in the aftermath of those discussed above producer priceswhich highlighted a monthly increase higher than expected (+0.5%) and a trend of +2.2%. However, the previous month’s reading was revised downwards both on a monthly basis (from +0.2% to -0.1%) and year on year (from +2.1% to +1.8%).
Furthermore, some cost categories also included in the core PCE index recorded a moderationsuch as the cost of outpatient hospital care, which fell by 0.1%, and airfares, which fell by 3.8%.
Data on the retail sales, unchanged on a monthly basis compared to the +0.4% expected by analysts. Excluding cars and gasoline, retail sales fell 0.1% in April, compared with an expected increase of 0.2%
