Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
What: US April inflation report
When: 12:30 GMT (14:30 CET) on Wednesday, 15 May 2024
Expectation: CPI YoY 3.4% vs 3.5% (March) and core CPI YoY 3.6% vs 3.8% (March)
How will markets likely react? Three consecutive months of higher-than-expected inflation prints have undermined confidence that inflation is on the right track. As we approach the release of April data, market participants are looking for signs that might persuade the Federal Reserve to consider cutting interest rates before the US election in November. Despite prices for goods continue to decline, gasoline prices rose to a six-month high while services costs have remained sticky. As a result, headline CPI is likely to rise faster than core CPI. A monthly increase of 0.4% in headline inflation implies that the three-month annualized CPI rate might decrease to 4.1%, but there could be a slight increase in the six-month annualized rate to 4%. Such figures would likely do little to bolster Federal Reserve members' confidence in starting to normalize monetary policy, thus potentially delaying expectations for rate cuts. Currently, bond futures are forecasting cuts totalling 41 basis points by December. However, an upside surprise in inflation data could lead to a reassessment to 25 basis points cuts or fewer, whereas a downside surprise might lead markets to forecasts two rate cuts by year end.
The below shows our views of market direction across key asset classes related to the US inflation report for both the upside and downside surprise outcomes.
Why does it matter? US inflation reports have for two years been a key events impacting the market’s pricing of Fed’s policy rate. Earlier this year the market was pricing as many as seven US rate cuts, but recent inflation reports showing persistent inflation has caused the market to now only pricing in one and a half rate cuts by December. Some market participants are even talking about no rate cuts at all this year. As the chart below shows, all inflation components except core services have come down and this is the reason why the market will obsess about the core CPI rate.