Source: Zhitong Finance
The US Bureau of Labor Statistics will release the March CPI data on April 10. This will be a key data with a significant impact on financial markets.
The US CPI data for March will be released this Wednesday evening. This data is the first test of the Federal Reserve's “inflationary bumps theory.” The market may be in the early stages of commodity price-driven inflation, and inflation may accelerate again if the Federal Reserve cuts interest rates too soon. As investors' expectations of the Fed's interest rate cut cool down, the stock market may face a deep correction in the near future, and may face a recession and bear market in the long run.
1. “Inflation turbulence theory”
The US Bureau of Labor Statistics will release the March CPI data on April 10. This will be a key data with a significant impact on financial markets. The US core CPI rose 0.4% month-on-month in January and February, which was higher than market expectations, and far higher than the month-on-month increase corresponding to the Fed's 2% inflation target — the month-on-month increase in core CPI must fall to 2% before the year-on-year increase is expected to fall to 2.4%. This is the upper limit of the year-on-year increase in core CPI that the Federal Reserve can tolerate.
Currently, the Federal Reserve sees the sharp rise in core CPI in January and February as a “bump” on the sustainable path to the 2% inflation target. As a result, the Federal Reserve did not “overreact” with hawkish remarks. In fact, according to the latest bitmap released by the Federal Open Market Committee (FOMC) last month, policymakers still expect to cut interest rates three times this year. This is also largely in line with market expectations.
The March CPI data will be the first test of the “inflationary bumps theory.” If the core CPI continues to rise unexpectedly, with a month-on-month increase of more than 0.2%, then we are more likely to see a comeback in inflation.
The market currently generally expects that the US CPI rose 3.5% year on year in March, up from 3.2% in February; the month-on-month increase was 0.4%, which is in line with the previous value. The market also expects the March core CPI, excluding food and energy, to rise 3.7% year on year, slightly down from 3.8% in February; the month-on-month increase is 0.3%, lower than the previous value of 0.4%.
2. Significant month-on-month increase in core CPI
It is worth noting that due to the base effect, if the core CPI increase in March is higher than 0.25% but less than 0.35%, the core CPI increase will remain unchanged at 3.8%; if it is higher than 0.35%, the core CPI increase will increase year-on-year. But more importantly, once we get past the peak of inflation in April and May 2023, if the core CPI continues to increase at 0.3% month-on-month, then the year-on-year increase in core CPI will begin to rise sharply in June.
This is important because the Federal Reserve is likely to start cutting interest rates in June. If the year-on-year increase in core CPI starts to rise at this point, the Federal Reserve will obviously not be able to start cutting interest rates under such circumstances. In fact, before the year-on-year increase in core CPI begins to rise in June, the Federal Reserve may have a brief window to cut interest rates, and this window has almost closed. Therefore, unless a recession hits, the Federal Reserve will indeed be unlikely to cut interest rates in 2024, as Minneapolis Chairman Kashkari warned.
The Federal Reserve urgently needs a 0.2% month-on-month decline in core CPI to cut interest rates to prevent a recession, especially before the US presidential election in November. But as long as the core CPI rises 0.3% or more month-on-month, the Federal Reserve cannot do this.
3. Key inflation drivers to pay attention to
Housing inflation has always been the main driver of core inflation and overall US inflation, particularly the equivalent rent for landlords. The indicator rose 0.6% month-on-month in January and 0.4% month-on-month in February. Considering the importance of housing in inflation, as long as housing prices rise 0.4% or more month-on-month, it is difficult to achieve a 0.2% month-on-month increase in core CPI.
The Federal Reserve's main hope is that housing prices will begin to fall. This is because market rents have begun to drop significantly, but this is not yet reflected in lagging official housing price data. Although the decline in market rents will eventually be reflected in official data, no one is sure that it will be in March. However, housing prices are related to housing prices, and housing prices remain near high points. This seems to mean that housing prices will not mitigate the March inflation data.
The most important variables now are actually commodities such as energy. Oil prices have been rising since the Federal Reserve turned to a dovish stance last December. If the Federal Reserve cuts interest rates too soon, commodity prices will rise again, which could start a wave of commodity-driven inflation.
Gold's recent record highs may be a leading indicator that people are worried that the Federal Reserve is letting inflation get out of control. But it's not just the dovish US Federal Reserve that is causing commodity-driven inflation; at least not yet, because the dollar is still strong. The Russian-Ukrainian conflict and the conflict in the Gaza Strip have had a major impact on the prices of commodities such as gold and oil. More importantly, as geopolitical tension intensifies, there is a high risk that oil prices will soar, and this situation may not be temporary. Energy prices rose 2.3% month-on-month in February, and this trend is likely to continue.
4. Summary
The US CPI for March may determine whether the S&P 500 Index and the Nasdaq 100 Index can make a decisive breakthrough in the current upward trend, and whether the stock market can recover and reach new highs before the recession. These all depend on the performance of major technology companies. On the other hand, an unexpected decline in the month-on-month increase in core CPI may reinvigorate the stock market's rebound. Given inflation dynamics and broader macroeconomic issues, some investors may choose to sell on high prices, mainly because the commodity-driven inflation situation is showing — even if the core CPI increase in March falls to 0.2% month-on-month, the Fed is unlikely to cut interest rates under the current circumstances.
Editor/jayden