The strength that US macroeconomic data continues to show (with a particular focus on employment) and a general reading of the latest inflation data lead to the same conclusion: It will take longer than desired/expected for the Federal Reserve to begin reducing interest rates set at 5.25%. -5.5%. The economy is resilient and prices are falling more gradually, so the central bank has less reason to rush, despite how painful such high funding costs can be for companies and citizens. This means that the dream of some of the Fed’s first easing in March is completely gone, and that the May easing is in jeopardy. If the turning point comes at least in June, it is likely that other central banks, such as the European Central Bank (ECB), will continue to cut, breaking the mantra that the Fed always calls the shots. But beyond that, life will go on and markets should not be afraid, no matter how angry they may be.
The market hysteria was perfectly reflected on Tuesday. The Department of Labor’s Bureau of Labor Statistics (BLS) released a tougher-than-expected January inflation report. Headline inflation slowed by three-tenths to 3.1% year on year, when 2.9% was expected. Even more worryingly, core inflation (excluding food and energy) remained at 3.9% year on year. But what sparked the hysteria were some troubling monthly figures: The headline CPI rose 0.3% and the core CPI accelerated 0.4% after two months to an already high 0.3%, which would mean rate higher than 4% if it were annualized.
Wall Street did not go into detail about the report, but reacted as expected. If they already thought the Fed’s first rate cut in March was buried, then swaps began to fall. “refuse” the first cut at the Fed meeting in May (chance dropped from over 50% to 30%) and gain weight in June. As for the overall cut in 2024, the optimistic 160 basis points that were discounted just three weeks ago (more than six 25bp cuts) has given way to about 90 (less than four cuts). The forecast is close to that made by Fed representatives in their December forecasts (three reductions). The translation into prices was not long in coming: a rise in Treasury yields, a rise in the dollar and a hit to stocks. The 10-year rate, always the benchmark, rose from 4.15% to above 4.3%. Not so long ago (end of December) it was below 3.8%.
If Fed President Jerome Powell’s small efforts in December to calm the market’s jittery rate-cut expectations triggered them further by putting March on the table, Tuesday’s inflation data will ultimately end at what is in some sense an open hole. . The failure to clear and quickly ease and then return to square one in a certain way explains the anger and anxiety reflected in the market. But the reality is that the economy remains strong, which should be a bullish argument in stock markets, and that the path of deflation, although more gradual than desired, continues. There seems to be no reason to panic.
The analysts’ thesis is that the stock market has risen very high What the expectation of an imminent rate cut will mean for some of the big tech companies that have been dragging the indexes heavily for months. But the “Magnificent Seven,” as the seven big tech companies driving the US stock market are called, do not represent the entire economy, as their repeated announcements of mass layoffs did: the real economy (“Main Street” as they say in the US). ) ) continues to demonstrate more than brilliant employment indicators. “The CPI reading and subsequent stock reaction are yet another demonstration of how stocks are now trading at the mercy of interest rates,” wrote Michael Kantrowitz, chief investment strategist at Piper Sandler. “We hope this behavior continues,” he adds.
Economists’ call for calm is primarily to keep January inflation data in perspective. A common theory is that the Fed may have problems with the so-called “the last mile of inflation”, as Tiffany Wilding, an economist at Pimco, puts it. “Patterns from the broader economic data set suggest that after the surprisingly quick and painless disinflation of 2023, inflation progress in 2024 is likely to be slower and more nuanced,” he writes in a commentary. The question is whether this problem will continue in the coming months.
“Swallow does not produce inflation”
“Swallow does not cause inflation,” Ulrich Leuchtmann of Commerzbank tries to put this into perspective. “If we look at just the core inflation data and smooth out the monthly rates, the picture that emerges is that inflation has been stagnant for some time. Without making assumptions about inflation dynamics, this Tuesday’s data does not indicate a new acceleration in inflation dynamics, but simply stagnation in the disinflation process.”
The bulk of January’s increase relied on the housing CPI, specifically the owner’s equivalent rent category in question: a measure that converts an owner’s monthly expenses (mortgage, taxes, etc.) into a kind of monthly rent. Also making significant contributions were the auto insurance index, which rose 1.4% month-on-month, airfare prices, which rose 1.4% month-on-month, and medical prices, which rose 0.7% month-on-month.
These latest games have led to a re-acceleration core services inflationcarefully controlled by the Fed through stronger relationship with wage pressure. For Edoardo Campanella of UniCredit Research, what happened in January is “somewhat surprising” given the moderation of most wage growth measures and because revised seasonal consumer price index factors released last week showed a slightly stronger decline in inflation in the “super basic” category (super basic sector). -core, excluding residence) at the end of last year than in the previous data collection.
On the housing side, some analysts, such as Capital Economics, have called the 0.6% monthly equivalent rent increase “suspicious” and believe incoming rental data from companies in the sector (such as Zillow) confirms what’s to come. weakening “We expect the decline in property prices to continue and housing inflation to eventually ease in the coming months, narrowing the gap with other measures of rent inflation,” confirms David Kohl, chief economist at Julius Baer.
The expert, like many others, focuses on personal consumption expenditure deflator (PCE) At the heart of this, in theory, is the Fed’s favorite inflation indicator. from car rental and insurance will not be as large as in the CPI, since they have less weight in its calculation. “It must be taken into account that core CPI has proven to be a poor indicator of core CPI in recent months and this trend appears to have continued into January. Housing has much less weight in the core CPI than in the PCE.” ” he explains. Paul Ashworth from Capital Economics.
However, says ING’s James Knightley, these almost conflicting messages The Fed’s receipt will reinforce the wait-and-see approach before cutting rates. January monthly rates are stuck at an annual rate of 3.7% or 3.8%, which is still too high even if one generously assumes that the PCE deflator is rising much more slowly than the CPI, Leuchtmann admits. Commerzbank. Something that contrast with the eurozone, where, despite the latest inflationary cycle (the peak was in October 2022, and in the US in June), the consumer price index is already below 3% and growth prospects are clearly weak. Thus, the probability of the ECB’s first rate cut in April is 45%, compared to 30% for the Fed in May.