Yesterday, the US Department of Labor released the CPI report for February: the data showed that due to rising gasoline and housing costs, the US inflation rate exceeded expectations for the second consecutive month.
Specifically, the US Consumer Price Index (CPI) rose by 3.2% YoY last month, reaching a new high since December last year, and surpassed the market expectation of 3.1%. At the same time, the MoM CPI also increased by 0.4%. Although in line with market expectations, it still exceeded January's growth rate of 0.3%, indicating that prices are still rising.
The core CPI, which excludes volatile food and energy costs, increased by 0.4% from the previous month and rose 3.8% YoY, both 0.1 percentage points higher than expected. Notably, the recent increase in the core CPI has made its annual growth rate for the past three months reach 4.2%, which is the largest increase since June last year.
The US Bureau of Labor Statistics also stated that 60% of the overall CPI MoM increase in February came from housing and gasoline prices. Among them, the Owner's Equivalent Rent (OER) has seen significant growth, and the prices of used cars, clothing, car insurance, and air tickets have also rebounded - with airfare recording the largest monthly increase since May 2022.
This CPI report further dampened the market's expectations for lower interest rates: after the report was released, FedWatch showed that the probability of the Federal Reserve keeping interest rates unchanged at the interest rate meeting next week has reached 99%, and the probability of first interest rate cut in May has dropped to 15%, and the possibility of a first interest rate cut in June has further fallen to 57%.
This morning's CPI report showed core inflation somewhat higher than expectations, on both a month-over-month and year-over-year basis. The report dashed hopes that January's hot CPI numbers were an aberration. A May rate cut was unlikely heading into today and this report probably reduces the likelihood of a June rate cut, though July remains a real possibility, commented David Royal, Chief Financial Investment Officer at Thrivent.
Melissa Brown, Director of Applied Research at SimCorp, also agrees with this view. CPI and core CPI both came in slightly higher than expected, suggesting that the economy remains strong and increasing the likelihood of a 'no landing' scenario. Today's report also increased expectations that the Fed would start to cut rates later rather than sooner, although they would still happen this year.
Our take on continued economic strength is that it could potentially push the onset of rate cuts farther down the road and that in fact if inflation does not settle down there is a small but real chance of rate hikes. The Fed's balancing act has become even more difficult, and the fact that this is an election year makes their task even more fraught, Brown added.
Interestingly, although the latest CPI report has most likely pushed back the time for when the Federal Reserve starts a loose monetary policy, from the reaction of US stocks, investors seem to be unfazed by this report.
Yesterday, all three major indices closed higher: the Dow Jones rose to 39,005.49 points, the S&P 500 rose by 1.12%, hitting the 5175 point level, and the Nasdaq also rose by another 1.54%. From individual stocks, Oracle, which just announced its quarterly report, surged by 12%, while NVIDIA rose by more than 7% again.
The CBOE Volatility Index, which is used to monitor market panic, also fell after the release of the inflation data.
It seems that the stock market is not anxious or worried due to the full-scale rebound in CPI data. And the large market volatility that analysts worried about beforehand did not occur.
Analysts at Citibank pointed out that the relative calm in the face of stronger-than-expected inflation data is actually unusual, and the market's rise yesterday also broke the usual trend on CPI release day since the Fed started raising interest rates.
Since March 2022, the S&P 500 has only moved by 1% or more on the day the CPI is released in a few cases, and most of the time, market rises have been due to lower core inflation - not higher.
So why did this unusual situation occur?
Skyler Weinand from Regan Capital pointed out that this indicates the current market sentiment of US stocks is extremely high. It's proving difficult to see what may stop the market's momentum, as earnings, inflation, and interest rates are moving in the right direction, the analyst said.
Analysts at the Bespoke Investment Group also believe that after excluding food, energy, and housing costs, the level of inflation is actually lower than before. This is likely a key reason for boosting sentiments in the stock and futures markets. Apart from that, they also believe that the downward trend in inflation seems to be tapering, and the market's faith in rate cuts is getting stronger.
The biggest thing to keep in mind is that even if the hotter data pushes out the timetable for rate cuts, the Fed still isn't hiking, the analysts wrote.