Before the market on Wednesday local time, the US Department of Labor disclosed the consumer price index for April, with a nominal CPI rate of 3.4% per annum, in line with expectations; the CPI rate increased by 0.3%, slightly lower than expectations of 0.4%; and the more critical core CPI annual rate fell further to 3.6%, in line with expectations, while falling to its lowest point since April 2021.
Since the CPI data for the first three months of this year all exceeded expectations, even though the April inflation data remained above 3%, “no shock” alone was enough to make US stock investors and international investors “struggling to strengthen the dollar for a long time” collectively celebrate.
After opening on Wednesday, the three major US stock indices rallied nearly 0.5%, driven by CPI data. The S&P 500 index and NASDAQ reached new record highs, and the Dow is expected to hit a record high in closing history.
The US dollar index dived at the same time. The USD/JPY fell by nearly 1% during the day, and spot gold rose by nearly $20 in a short time, hitting 2,380 US dollars/ounce at one point. In response to increased expectations for the Federal Reserve to cut interest rates, the 10-year US Treasury yield continued to fall back to where it was in early April.
Based on the confidence brought by CPI data, the swap market's prediction probability that the Federal Reserve will cut interest rates for the first time in September has also risen above 70%, while the probability of two interest rate cuts before the end of the year is also over 50%.
Service prices are still growing at a high rate
The US Department of Labor report shows that housing prices, which Federal Reserve officials have emphasized over and over again, are still a big problem. In the April CPI composition, housing prices, which weigh nearly one-third, rose 0.4% month-on-month and 5.5% year-on-year. For the Federal Reserve, which is trying to pull the inflation rate back to the 2% level, it is difficult for Powells to feel at ease with a 5% increase.
At the same time, due to fluctuations in international oil prices, energy prices rose 1.1% month-on-month (2.6% year-on-year increase) in April, which is also a key component driving overall CPI. The price of transportation services, which has received a lot of attention in the service sector, continued to rise 0.9% in April, bringing the year-on-year increase to 11.2%. Prices of new and used cars, which once boosted inflation during the pandemic a few years ago, continued to fall month-on-month in April.
Of course, the Federal Reserve had no expectation that inflation would subside quickly. While attending an event in the Netherlands on Tuesday, Powell said that reducing inflation will not be an easy path and that the Federal Reserve will need to “wait patiently for restrictive policies to take effect.”
Also on Wednesday morning, the US Department of Commerce released the April retail sales data. Against the backdrop of a slight decline in March data (to +0.6%), the month-on-month growth rate in April was still zero, significantly lower than the 0.4% market growth forecast. The analysis points out that in an environment of high inflation, along with the rise in gasoline prices, consumers have to cut back on consumption in other sectors.
Combined with the latest inflation data, the income of American workers actually fell 0.2% month-on-month after adjustment for inflation, and only increased 0.5% in terms of year-on-year data.
First-line interpretation
Nick Timiraus, a well-known macro reporter and macro reporter known as the “Federal Reserve's microphone,” said after the data was released that the April report showed that inflationary pressure had eased, which would allow Fed officials to more comfortably maintain the current policy at next month's policy meeting.
Timiraus also stressed that in view of the “stress disorder” brought about by the normal data for the previous three months, it is difficult to offset the previous three bad data by looking at the April data alone; an additional two months of data may be needed to strengthen the confidence of officials in declining inflation. Therefore, it is unlikely that the Federal Reserve will be ready to cut interest rates until the September meeting. But the good news is that the April data at least dampened the risk of the Federal Reserve's policy shift (rate hike).
Cayla Seder, a macro cross-asset strategy analyst at State Street, also believes that both CPI and retail sales data help confirm that monetary policy transmission is working and should support risky assets. However, to truly strengthen confidence that “interest rate cuts are imminent,” we may need to see today's data continue, but today may be the beginning of this trend.
Seema Shah, chief global strategy analyst at Xin'an Global Investments, also warned that weaker than expected retail sales data requires close attention. The cooling of consumer spending is a good thing, but if this turns into a deeper slowdown, it may indicate some economic problems that the market does not want to see.
edit/new