Evening Brief – 04.10.24
What Now?
The Consumer Price Index (CPI) for March rose 0.4%, the Bureau of Labor Statistics reported on Wednesday, compared with the 0.3% consensus forecast. It increased 3.5% annually versus forecasts of 3.4%.
Core CPI rose 0.4% month-on-month in March, against expectations of a 0.3% rise. Annually, it gained 3.8% versus the estimated 3.7% increase.
Energy prices jumped 1.1% after rising 2.3% in February, while shelter expenses, which account for almost one-third of the CPI, increased by 0.4% on the month and 5.7% year on year.
The hotter-than-expected inflation report has substantially weakened the dovish case for the Federal Reserve to begin easing monetary policy in June, raising the question of whether any rate cuts will occur this year (see Tuesday’s Evening Brief).
Following the release of the data, the markets began to price in only a 19% probability of a Feda rate cut by the June 12 FOMC meeting, according to the CME FedWatch Tool, down from 54% before the announcement.
For the remainder of the year, the markets are pricing in 23% odds of at least three quarter-point rate cuts from the current 5.25% to 5.50% target range, down from 44% ahead of the CPI data. Meanwhile, odds of one quarter-point cut or less popped to 42% from 15%.
“Today’s print sealed the fate for the June FOMC meeting with a hike now very unlikely,” Seema Shah, economist at Principal Asset Management, told Bloomberg. “In fact, even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the U.S. election will begin to heavily intrude with Fed decision making.”
Over the last three months, core CPI has climbed at a 4.6% annual pace. That’s faster than any three-month period between August 1991 and 2020. Over the last 12 months, core CPI has climbed 3.5%. That’s faster than any 12-month period between February 1993 and 2020.
“The 3-month annualized core CPI climbing to 4.6% is going to keep early Fed-cut calls muted. 50 basis points of cuts in 2024 currently being priced may not occur until later in the year. The yield curve flattening isn’t surprising as we continue to price out early and deep cuts,” said Ira Jersey, Bloomberg rates strategist.
The financial markets reacted accordingly to the hot inflation print. The major equity indexes were down roughly 1% (the S&P 500 traded near one-months lows), the U.S. dollar rallied sharply, U.S. Treasury yields moved higher, particularly the policy sensitive 2-year yield, which rallied 22 basis points and is quickly closing in on 5% again, and the yield curve bear-flattened to its most inverted level since December 2023.