Damo believes that the market has been surprised by “exceeding expectations” many times before, and that the current April CPI is in line with expectations does not mean that the Federal Reserve will start cutting interest rates early in July.
Although recent economic data shows that the US economy is cooling down, Damo believes it is still impossible for the Federal Reserve to cut interest rates in July.
In Friday's report, Morgan Stanley stated:
This week's data helped market pricing return to expectations of cutting interest rates twice this year. We believe that the market still underestimates the number of interest rate cuts this year, but the Fed needs more evidence before it starts cutting interest rates.
Damo expects that due to data volatility, the Federal Reserve will maintain interest rates as planned until September:
The April economic data will change from a “positive surprise” to a “negative surprise”. This shift began with April's employment data, followed by this week's retail report. There was no particularly surprising decline in CPI inflation data, but since the previous rate exceeded expectations, a data that met expectations was a huge comfort for the financial market.
After rising inflation in the first quarter, April inflation began to decline this week. The 3-month annualized growth rate of core personal consumption expenditure (PCE) inflation soared from 1.6% in December 2023 to 4.4% in March 2024. According to April CPI, PPI and import price data, core PCE is expected to increase 0.26% month-on-month in April, compared to 0.32% in March. This will cause the 3-month annualized growth rate to fall back to 2.7% in June.
Furthermore, Morgan Stanley analyst Diego Anzoategui re-accelerated inflation in the first quarter of 2024, and also supports that it is still too early to cut interest rates in July, but it is still appropriate to cut interest rates three times this year.
Editor/Somer