Source: Wind
After April's inflation data cooled more than expected, traders seem increasingly convinced that the Federal Reserve may start cutting interest rates as early as September.
However, some analysts are far from convinced that the Fed will cut interest rates soon. According to data released by the US Labor Bureau of Labor Statistics (Labor Bureau of Labor Statistics) on Wednesday, the consumer price index (CPI) rose 0.3% from March. CPI is a broad measure of the cost of goods and services at the cash register. This is slightly below the market forecast of 0.4%.
Weaker-than-expected economic data released on Wednesday pushed the stock market to another record high and raised speculations about when the Federal Reserve is preparing to start cutting interest rates. According to data from the CME Federal Reserve Watch Tool (FedWatch Tool), traders currently expect a 70% chance that the US will cut interest rates in September. This marks a significant increase compared to earlier this week.
Jerome Schneider, head of short-term portfolio management at PIMCO, said on Thursday that the latest US inflation data confirmed to investors that the possibility of a recent rate hike is now “not within the scope of consideration.”
“I think in the larger context, we have to really understand that we're already celebrating lower inflation, and so is the market. But at PIMCO, we are particularly considering the long-term trajectory of how the Federal Reserve will respond to these data,” Schneider said.
“More importantly, when you look at the consumer price index and the personal consumer spending price index, which are the Federal Reserve's more general indicators of inflation, they are still relatively elastic,” Schneider said. “In fact, to keep these core figures below 3%, we'll have to see 0.2% or lower for the rest of the year, and we're still far above that level.”
He added that while the latest inflation data provided some relief, in the context of the Federal Reserve rapidly approaching the 2% target, “probably not likely at this point in time.”
In addition to the latest US inflation data, data released by the US Department of Commerce on Wednesday showed that retail sales for the month were the same as last month, while the previous forecast was a 0.4% increase. This figure seems to indicate that consumer spending in the world's largest economy has lost some momentum.
“If you look at inflation data together with retail sales data from earlier this week, this is a significant loss, and it really weakens the discretionary sector. For me, it tells us a story about consumers who are beginning to feel the impact of these higher interest rates,” said Jacob Mitchell, chief investment officer and founder of Antipodes Partners.
“I think the market may start to see weaker data coming, which will make the job of the Federal Reserve a little easier.”
When asked if the CPI data indicated that the Federal Reserve would cut interest rates in September, Mitchell replied, “I agree, you're not getting the key components, services, and equivalent rent for landlords that you need.”
He added: “These two factors, look, if we don't get weaker commodity data, then in the second half of this year, you'll see a base effect, so you'll naturally see core CPI accelerate again.”
edit/emily