Analysts at Macquarie believe one month of at-consensus core CPI may not be “enough” to start the Federal Reserve’s countdown on a rate cut.
Assessing the recent data and its potential impact on the Fed’s interest rate policy, the firm said the latest print was as expected but far from enough.
“An in-line print is probably not good enough for the Fed to start a countdown to rate cutting. Fed speakers may affirm this ‘guarded’ view starting today. So, we don’t anticipate much follow-through in FX or UST yields,” said Macquarie.
Nevertheless, they feel that Wednesday’s US CPI report was notable because it seemed to mark an end to the stream of top-side surprises that began in January.
“The downside drivers in yesterday’s report weren’t a huge surprise – there were lower airfares, lower used and new car prices. Also, the long-awaited decline in housing rents started to peek through,” adds the firm. “But some of the peskier components stayed pesky. Car insurance costs rose 1.8%, on top of March’s sharp increase. Also, recreation services (a discretionary spending item) accelerated to 0.3% (vs. 0.1% prior).”
As a result, one month of at-consensus core CPI is seen as maybe not being “enough” to start the Fed’s countdown on a rate cut as Macquarie explains that the +0.3% core CPI print is still a “high” print, which puts the three-month annualized CPI inflation at a still-strong 4.1% as of April.
“Even when you subtract 70-80 bps to derive a ‘back-of-the-envelope’ for the core PCE PI-equivalent, this could still be viewed by the Fed as far from the target and indicative of inflation that was still sticky,” they state.
