Inflation shock sends tremors across Wall Street
Was that an earthquake?
The Ministry of Labor reported: Consumer Price Index (CPI) March rose by four-tenths of a percent, beating expectations and matching February’s readings. The so-called core consumer price index, which excludes food and energy prices, also rose 0.4%.
of The year-on-year headline inflation rate was 3.5%.This was up from 3.2% in February and also exceeded expectations of 3.4%. Core inflation rose 3.8% for the second month in a row, defying expectations that it would cool.
If you annualize these numbers, you can see how much inflation is progressing.that one month Annualized overall CPI is 4.6 The core is running at 4.4%.
Many economists like to say something like this: 3 month annualized figure Smooth out monthly fluctuations and understand inflation trends. This became particularly popular at the end of last year, when three months of annual statistics appeared to show that inflation had been defeated. For example, in the three months of November, the headline CPI increase was 1.7% annualized, and the core rate was 2.8%.
now things are going in the opposite direction. The three-month annual rate of headline inflation is 4.6%. Core is 4.4%. The victory over inflation that the Biden administration and many on Wall Street were so eager to celebrate last year now appears to have disappeared. Temporary.
Wall Street’s recent history of underestimating inflation
This is the fourth consecutive month of higher-than-expected inflation. It’s natural to underestimate inflation at one time or another. But doing so consistently month after month shows a serious failure of economic analysis and a stubborn refusal to accept inconvenient realities. inflation is embedded That’s well above the Fed’s 2% target.
The CPI report sent shockwaves across Wall Street and, like last week, roiled the market. earthquake It shocked Tohoku. Stock prices fell and bond yields rose. The yield on the 10-year U.S. Treasury rose above 4.5%, the highest level since November. The yield on two-year government bonds is in the 5% range. Up more than 80 basis points since mid-January.
Traders work on the floor of the New York Stock Exchange during afternoon trading on April 9, 2024 in New York City. (Michael M. Santiago/Getty Images)
market Chances of interest rate cuts drop significantly in June and July. The federal funds futures market yesterday suggested the probability of a rate cut was about 60%. After the release of the CPI report, this fell to 17%. The probability of a rate cut in July has fallen from nearly 75% to 43%. The market value of the total reduction this year has fallen from three to two.
The persistence of inflation in March’s data echoes many Wall Street analysts who say the higher-than-expected highs in January and February were a result of seasonality and companies implementing annual price changes in early 2019. It destroys the claim. Year. This doesn’t make much sense since inflation data is already adjusted for seasonality. With inflation continuing to rise through March, it is clear that: The acceleration was not just an anomaly or an oversight in adjustment..
Powell gets shocking answers
In recent remarks at Stanford University, Jerome Powell Fed Chairman “It is too early to tell whether recent measurements simply indicate an increase.” That may have been true a few days ago, but it’s never too early. This isn’t just a shock.
At Stanford University, Chairman Powell reiterated the Fed’s belief that “we do not believe it is appropriate to lower interest rates.” Until there is more confidence that inflation is falling sustainably towards 2%.” March consumer price index (CPI) data will likely erode confidence in the view that inflation is on a downward trajectory.
Federal Reserve Chairman Jerome Powell speaks at Stanford University on April 3, 2024 in Stanford, California. (Justin Sullivan/Getty Images)
It is no exaggeration to say that the contents of the report were not reassuring.So-called “Supercore” inflation A measure recently invented to show that inflation isn’t actually that bad (core services excluding shelter) has recently done the opposite.This is an increase of 0.65% month-on-month and an annualized rate of An amazing 8.5%up from 7.8 percent in the previous month.
Wall Street has abandoned its childish dream of a June rate cut and is moving closer to capitulating to a July rate cut. The Fed does not want to make its first rate cut on the eve of an election, so the September meeting will likely be taken off the table. This leaves open the possibility of cuts in November and December.
Most likely scenario But so far, the Fed hasn’t cut rates at all this year. The announcement of interest rate trends for the first time since July 2023 may end up waiting until March next year. But if inflation continues to show signs of bending, that move could result in a rate hike.
