CPI Inflation Index Below Expectations by 0.3%

Market Expections Rise for September Rate Cut

Summary: US inflation fell to 3.4% in April, meeting economists’ expectations, leading investors to anticipate Federal Reserve interest rate cuts. The CPI data indicated a decrease from March and halted a streak of higher-than-expected inflation. The market reacted with increased bets on rate cuts, causing bond yields to drop and stock futures to rise.

Key Points:

• US inflation dropped to 3.4% in April, aligning with forecasts and prompting expectations of Fed rate cuts.
• Market reaction included increased bets on two rate cuts by December, leading to a decrease in bond yields and a rise in stock futures.
• Despite the decline in inflation, concerns remain about meeting the Fed’s 2% target in the near future.
• Core consumer prices rose by 3.6% annually, but the monthly increase was lower compared to March, with food and energy costs excluded.
• President Biden’s economic ratings have been impacted by high inflation close to the upcoming US election.

Investors found encouraging indications in the report that the Federal Reserve’s efforts to curb inflation are starting to have a positive impact on the US economy. The yields on 10-year Treasury bonds, which decrease as prices go up, saw a slight drop. Stocks continued to rise in May. While the report on Wednesday may not be enough on its own to sway Fed officials on when to start reducing rates, it does not contain any alarming information that would prompt fears of rate hikes. This allows central bankers to remain at ease and keep rates steady at their upcoming meeting. The FED would have to see probably a couple more positive reports to feel comforable cutting in September.

Implications for other central banks like the ECB are positive. This means that a rate cut earlier than the FED would now come with lower expectations of interest differencials between the two major central banks. Thus, the EU would not likely face a stronger dollar which would impact inflationary pressures.

For small cap stocks such as the Russell 2000, they will not move as much since interest rates have not come down yet. But for larger stocks this is welcome news and expect momentum to push the market higher.