Following today’s news that US May annual headline CPI inflation has been lower than expected, with a rise of 3.3%, market watchers are now wondering how the US FOMC will interpret these data and whether it’ll prompt them into interest rate cutting action later today.
Experts from across the industry have been sharing their responses to the latest inflation data as well as their outlook as to what it might mean for markets as follows:
Nathaniel Casey, Investment Strategist at Evelyn Partners, the wealth management group, comments: “May’s inflation report came in softer than the aggregate of forecasters expectations with headline CPI decelerating slightly against April’s figure to 3.3%. Core inflation continued to tick down to 3.4% from 3.6% April and 3.8% in March.
“In terms of the volatile food and energy components, food decelerated slightly to 2.1% on an annual basis driven by a -0.2% monthly print for the food at home category. Energy accelerated to 3.7% from 2.6% on an annual basis as headwinds from base effects mitigated some of the downward momentum provided from a 3.6% fall for gasoline over the month of May.
“The index for shelter continued to remain robust, rising by 0.4% on the month which has now occurred for four consecutive months, leading to an annual price change of 5.4%. However, core commodities continued to soften, helping drive todays softer than expected print, with -1.8% reported on an annual basis. Within this, new vehicles are providing some dovish momentum, contracting 0.5% in May, having previously contracted 0.4% in April.
“Today’s softer than expected inflation print has put a dovish tilt back on rate expectations, money markets now expect 50 basis points of rate cuts this year, prior to this print only 37 basis points of cuts were expected.
“Market relief was evident in the immediate price action following the release with the 2- and 10-year falling by 15 and 11 basis points respectively. US equities also traded higher with S&P futures up nearly 1% in pre-market trading.
Giving us the bottom line view, Casey said: “Markets have taken a sigh of relief following today’s softer than expected inflation print out of the US. Eyes will now be on policy setters at the FOMC to see if this softer print will materially change their interest rate outlook. However, it is likely committee members will want to see one or two more encouraging inflation reports before committing to their first rate cut.”
Also commenting on these data, Janet Mui, head of market analysis at wealth manager, RBC Brewin Dolphin, said: “Today’s US inflation data provided some positive news for financial markets, which want to see rate cuts by the Federal Reserve this year. Both US headline and core CPI slowed more than expected in May, with core CPI the lowest since April 2021. The fall in gasoline prices was a key driver of the flat CPI month-on-month, which helped to offset the ongoing strength in shelter inflation. There are a few positive reads in the report, such as a big drop in airfares as well as a modest fall in new vehicle prices and car insurance. Real wage growth (wage growth adjusted for inflation) accelerated from 0.5% to 0.8% in May, meaning households on average are benefitting from a resilient labour market and lower inflation.
The elephant in the room remains the elevated shelter inflation, which is taking longer to slow, but leading indicators suggest it will eventually. The CPI data provides more evidence of disinflation for the Fed, but since both headline and core CPI remains above 3%, more progress is needed for a shift to an outright easing stance. We will get an update on the Fed’s latest thinking from its summary of economic projections and rate expectations. Markets are reacting positively now, which may sustain, as long as we don’t get a significant hawkish tilt from the Fed.”
Andrew Summers, Chief Investment Officer at Omnis Investments, comments: “This report should be welcomed by inflation watchers but doesn’t change the fact that the early part of this year has seen inflation surprise to the upside, which will likely see the Fed change its economic forecasts. The key elements of concern to the Fed are inflation in the service sectors and wage growth, both of which have proven sticky so far this year. We believe that is likely to change as we approach 2025 as the labour market weakens and that whilst the number of interest rate cuts expected by the markets in 2024 have fallen, it’s more a question of when and not if, policy is eased.”
Lindsay James, investment strategist at Quilter Investors said: “With the Federal Reserve meeting later on today, all eyes have been on this inflation print and what indication it gives for when rate cuts may be initiated. Unfortunately for markets, the news that the annual rate of inflation has declined marginally compared to the previous month means we remain stuck in a holding pattern, waiting for either inflation to come down more quickly towards the 2% target, or for the economy to buckle under the strain and require a fresh bout of stimulus.
“Ultimately, despite weakening GDP growth, inflation simply remains too hot to warrant a rate cut at this juncture. With mixed signals coming from the labour market, showing strong payrolls data alongside rising unemployment and falling vacancies, the picture of a gradually slowing economy is not yet enough to ring alarm bells at the Federal Reserve, who remain laser-focussed on price stability. With the main lesson from the Great Inflation period of 50 years ago being that cutting interest rates too early can prove disastrous, both for the economy and for one’s personal reputation in the history books, the Federal Reserve will be anxious to avoid repeating the monetary mistakes of the 1970’s. For now, one rate cut this year remains a sensible prediction.
“For consumers, the data suggests that gas prices have eased somewhat in May, providing relief as we enter into the business end of the presidential election campaign. The economy, and inflation in particular, is going to be a significant battleground theme that both candidates are judged on. President Biden has clearly been at the helm of a strong economy through a challenging period, but if the polls are to be believed, he isn’t getting thanked for it. Inflation has made people feel poorer and this will be hard to overcome, no matter what CPI does from here.”
