Written by Isabel Wang and Vivian Lu Chen
Tuesday's CPI report represents 'potentially pivotal moment' for interest rate forecasts: BMO Capital Markets
A month after the U.S. stock market suffered its worst consumer price index release day in a year, investors are worried about a pullback when the latest inflation data is released Tuesday morning. Testing the 2024 bull market in stocks.
See also: CPI inflation is driven up by gasoline, car insurance and housing
The February Consumer Price Index (CPI) report predicts that inflation will rise slightly again due to higher prices for gasoline, home and auto insurance. The headline CPI is expected to rise 0.4% last month, faster than January's 0.3%, while the annual rate is expected to remain at 3.1%, according to a Wall Street Journal survey of economists. ing.
The core index, which strips out the volatile food and energy components and is considered a better indicator of the underlying pace of price changes, is forecast to rise 0.3% in February, one tick higher than the previous month. low. Year-on-year core inflation is expected to fall to 3.7% from 3.9% in January.
Ian Lingen and Beil Hartman, interest rate strategists at BMO Capital Markets, said Tuesday's CPI report is a “pivotal moment” for monetary policy expectations, which have been in flux since the release of January data on Feb. 13. He said it was possible. In a summary of its economic outlook to be released at the end of next week's policy meeting, the Fed noted that updated inflation information will also play a key role in refining the Fed's own interest rate outlook.
In a note to clients on Monday, Mr. Lingen and Mr. Hartman wrote that as long as core inflation remains below the levels seen in January, the market will continue to grow under the assumption that the Fed's anti-inflation efforts are largely successful. said it is likely that they will be able to move forward with confidence.
“This leaves the biggest risk as a new report showing the tenacity of realized inflation,” BMO said, adding, “In the face of consistent global inflation pressures, investors doubt the effectiveness of Fed policy.” “This is certainly a risk we should be wary of as we contemplate this,” they said.
Traders are pricing in a more than 50% chance of the Fed's first rate cut by June, and “a significant shift in policy expectations is certainly on the table,” BMO strategists wrote. .
Markets are pricing in a 97% chance that the Fed will keep interest rates unchanged in the range of 5.25% to 5.5% after its next meeting on March 20th, while also pricing in the possibility of a rate cut of at least 25 basis points before its next meeting. I'm here. Participation rate for the May meeting was just 18.8%, down from 52.2% just one month earlier. However, the chance of a similar move occurring by June is priced at 59.1%, according to the CME FedWatch tool.
“Investor concerns about the effectiveness of monetary policy in response to the type and magnitude of realized inflation currently facing the United States are compounded by a recognition that the balance of the real economy will remain resilient in the long run,” Lingen and Hartman wrote. It's ingrained.”
See also: Stock market's 2024 bull market faces looming inflation report
While investors grapple with uncertainty over interest rate cuts and inflation, U.S. stocks remain at record levels, with the S&P 500 SPX hitting its 16th record close of 2024 on Thursday. It has soared to a high level. This is supported by mega-cap tech stocks, which benefit from growing optimism about the health of the economy. The economy and the surge in demand for artificial intelligence applications.
Over the past two years, the CPI report has caused significant market volatility both before and after the release of the statistics, as the persistence of inflation has become one of the main concerns in the market. However, CPI-day stock market movements were relatively calm in 2023, as policymakers acknowledged that inflation has consistently declined over time.
But that volatility is gripping the U.S. stock market again this year. With the latest CPI release date last month, the three major stock indexes had their worst CPI release date performance since September 13, 2022, while the small-cap Russell 2000 index RUT had its worst performance since March 11, 2020. It was the day the CPI was announced. , according to Dow Jones Market Data (see graph below).
So a stronger-than-expected February inflation report could reignite market concerns about sustained high inflation and a scenario in which the Fed continues to delay rate cuts.
Fundstrat's Tom Lee said he sees the CPI release as a “buy-on-the-moment” moment for the stock market, adding that February's inflation report could remain “hot” due to “residual seasonality”. This is because the two largest inflation rates in the February inflation report are likely to continue, although they are high and should fade by March. Core CPI drivers, home and auto insurance, will see improvement in the second half of 2024.
Furthermore, Federal Reserve Chairman Jerome Powell's testimony to Congress last week showed a commitment to lower interest rates, and Friday's February jobs report, which showed the unemployment rate at the highest level in two years, suggests that interest rates will be cut by mid-year. strengthened the basis for Lee said in a client note seen by MarketWatch on Monday.
U.S. stocks edged lower Monday afternoon, with the S&P 500 down 0.2%, the Dow Jones Industrial Average DJIA down 0.1% and the Nasdaq Composite Index down 0.4%, according to FactSet data.
-Isabel Wang -Vivian Lu Chen
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03/11/24 1415ET
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