US Consumer Prices Rise More Than Expected, Impacting Stock Market and Fed Rate Cut Speculation
The latest data from the Bureau of Labor Statistics has revealed that US consumer prices rose more than expected in January. This unexpected increase has had a significant impact on both the stock market and speculation surrounding a potential rate cut by the Federal Reserve.
Investors have been closely monitoring these consumer price figures in order to gain insights into when the Federal Reserve might begin cutting interest rates. Prior to this report, it was widely believed that the central bank would initiate rate cuts in May. However, the new data has caused a shift in expectations, with markets now pricing in a nearly 80% chance of rate cuts happening in June.
Eugenio Aleman, the chief economist at Raymond James, expressed his concern about the report’s implications for those who were betting on an imminent rate cut. He stated, “This was a bad report for those betting the Fed is going to start decreasing interest rates soon.”
Ellen Zentner, the chief US economist at Morgan Stanley, also weighed in on the matter, emphasizing that the acceleration in core Personal Consumption Expenditures (PCE) aligns with their predictions of a challenging road ahead. Zentner believes that the sequential prints in the first quarter of 2024 will generally be higher than those observed in the previous six months. This acceleration in consumer prices will likely be a contributing factor to the decision to delay rate cuts until June.
Citi, on the other hand, warned that the higher-than-expected inflation print could potentially impact the recent rally in the stock market. Stuart Kaiser, head of Citi’s US equity trading strategy, explained, “Strong core CPI is not a game changer but likely to drive a short-term pullback.” He further noted that with strong growth data supporting the economy, it would be challenging for the Federal Reserve to cut rates as early as some investors had hoped. This situation could raise concerns about the possibility of an overheating scenario, despite the current restrictive policy.
The stock market responded swiftly to the news, with stocks tumbling in early trading. Additionally, the yield on the 10-year Treasury note experienced a slight increase of about 10 basis points, reaching a level close to 4.3%.
While this report has certainly caused some turbulence in the market, experts believe that the overall strength of the economy will limit the extent of any potential pullback. Stuart Kaiser noted, “We should get a pullback here, maybe in the 2-4% range, but that is somewhat limited by the fact that the economy is still quite strong.”
In conclusion, the unexpected rise in US consumer prices has had significant implications for both the stock market and speculation surrounding a potential rate cut by the Federal Reserve. The market now anticipates rate cuts to occur in June, contrary to previous expectations of a May start. This inflation print has also raised concerns about a potential short-term pullback in the stock market. However, experts believe that the overall strength of the economy will mitigate the extent of any potential decline. As investors continue to monitor economic indicators, it remains to be seen how these factors will shape future market trends and monetary policy decisions.