The U.S. CPI data for March once again exceeded expectations, triggering concerns among Wall Street analysts about the direction of inflation. It is widely believed that the Federal Reserve needs to maintain higher interest rates for a longer period and wait for more moderate evidence of inflation, so the possibility of a rate cut in June is almost nonexistent. Goldman Sachs economists predict that the Fed will cut interest rates twice this year, in July and November respectively. These economists believe that after three relatively strong inflation data points from January to March, more months of milder data are needed to balance it out. Overall, the direction of inflation development is concerning, leading to a delay in the timing of rate cuts
The U.S. Bureau of Labor Statistics released the CPI data for March on Wednesday, which exceeded expectations once again. This marks the third consecutive month of higher-than-expected inflation this year. Wall Street analysts generally believe that a rate cut by the Federal Reserve in June is highly unlikely, and the 10-year U.S. Treasury yield is expected to rise above 4.5%.
David Kelly, Chief Global Strategist at Morgan Stanley Asset Management, stated:
"The door for a rate cut in June has been closed. It's off the table."
Economists at Goldman Sachs predict that the Fed will cut rates twice this year instead of three times. They previously expected rate cuts in June, September, and December, but now favor cuts in July and November.
"We believe that the FOMC needs to see more moderate data following three relatively strong inflation figures from January to March to balance things out."
Morgan Stanley economist Ellen Zentner said,
"The sharp rise in core CPI and the need for the Fed to start cutting rates in June are further apart. Tomorrow's PPI data, along with the March CPI data, is likely to delay the Fed's rate cut, pushing it beyond our current forecast of June."
Fitch's Chief Economist Brian Coulton commented:
"The so-called 'super-core' CPI index - excluding rents in the services sector - jumped from a 3.9% annual rate in February to 4.8% in March, showing that inflation is rapidly moving in the wrong direction."
Bloomberg economist Anna Wong noted:
"March is typically when CPI enters a seasonally favorable window for disinflation. However, core CPI in March remained the same as in February, even though it equates to about 0.3% in core PCE inflation, which is not a good development. This report is more likely to make the Fed concerned that progress in easing inflation is stalling, despite the two months of identical core data."
Bloomberg's interest rate strategist Ira Jersey stated:
"The three-month annualized core CPI rising to 4.5% this year will dampen expectations for an early Fed rate cut. The market currently expects a 50 basis point cut in 2024, which may be pushed back to the end of the year. With the dissipation of expectations for early and substantial rate cuts, a flattening yield curve is not surprising."
"The timing of the 2024 rate cut expectation is a focus for market participants, with the probability of the first rate cut in July falling to less than half in linear market forecasts. However, the 'super-core' inflation with a three-month annualized increase of over 8% may continue to exert upward pressure on the Fed's ultimate rate floor expectations."
"Due to the higher-than-expected CPI data, it is almost certain that the 10-year Treasury yield will test 4.51% again. If this level is not sustained, 4.7% will be the next stopping point." Principal Asset Management economist Seema Shah:
"Today's data sets the tone for the June FOMC meeting, and it now seems highly unlikely for a rate hike. In fact, even if inflation falls to a more comfortable level next month, the Fed may already be cautious enough that a rate cut in July seems forced, especially with the upcoming U.S. election significantly influencing the Fed's decisions."
J.P. Morgan rate strategist Priya Misra:
"This is a key report for the market, as the past two reports have shown slightly higher numbers (0.4% month-on-month), which the Fed sees as 'bumps in the road' rather than a change in the trend of easing inflation. With fading rate cut expectations, rates have risen in the past few weeks but still have room to rise. I believe that if the 10-year Treasury yield exceeds 4.5%, risk assets will be sensitive to rate changes. So far, risk assets have been able to ignore high inflation data as the Fed has not paid attention to it. But I think the situation will change now... Core strength is mainly driven by auto insurance and healthcare costs - both of which impact the core PCE deflator in different ways. Therefore, the upcoming Fed speeches will be very important."
Goldman Sachs Asset Management multi-sector fixed income investment head Lindsay Rosner:
"It is important to note that this number has not shaken the Fed's confidence; however, it has indeed cast a shadow on confidence. When it comes to spread risk, a higher CPI reading will not disrupt the larger macro narrative that the economy is strong, defaults remain moderate, and market technical factors still support spreads in this range."
CME Group chief economist Erik Norland:
"Considering recent trends in fuel prices, the overall year-on-year inflation rate may exceed 4% in the future. So far, the concern has been inflation sticking at 3%, but few have discussed the risk of reaccelerating to 4%."
Lombard Odier Asset Management's Florian Ielpo:
"If the Fed sticks to its 'one rate cut in June' stance, real rates may remain stable, and inflation compensation may increase. This will support the stock market, as real financing conditions will not tighten further, and profit margins may benefit from inflation exceeding expectations."
Apollo Global's Torsten Slok:
"Loose financial conditions continue to provide important support for growth and inflation. Therefore, the Fed has not yet finished its battle against inflation, and rates will remain at higher levels for longer."
Bloomberg's Sebastian Boyd stated:
" Today's CPI data adds evidence to the fact that U.S. monetary policy is not as restrictive as the Fed believed, so rates may need to stay at higher levels for longer. There are many reasons for this situation: the wave of resignations during the pandemic may have already increased labor productivity as people find new jobs that suit them better Higher government spending will also push up neutral interest rates. But every time we get an overheating indicator, it strengthens the argument that the traditional way of measuring neutral interest rates is too low. If this is the case, the result will be higher yields and a flatter curve, as the Fed will not only be able to cut rates less than expected in the short term, but will also need higher yields in the long term."
Some analysts also believe that the inflation data in March is disastrous for Biden. The financial blog ZeroHedge believes that officials at the Bureau of Labor Statistics seem to have voted for Trump. Bloomberg's Enda Curran also said,
"Let's be clear - today's data has both economic and political implications. Economically, it's simple: it looks like the Fed is unlikely to cut rates in the short term (unless something unexpected happens). The political implications are less clear but equally important: opinion polls repeatedly show that voters are dissatisfied with the economy, and news reports suggest that the inflation story is far from over, which won't improve their mood."