Key takeaways
- Headline inflation dropped to 5% in March, down from 6% in February and the 9.1% high of June 2022
- Core CPI accelerated slightly to 5.6%, which was bang on target with what analysts predicted
- When considering jobs, unemployment and PCE data, the Fed’s aggressive rate increases seem to be paying off
The big economic news of today is that headline inflation has dropped to 5%, the lowest figure since 2021, which has pushed up the stock market and driven Treasury yields down. When considered against jobs, unemployment and PCE data, the overall picture looks brighter than it has in a long time.
It’s enough to make you think the Fed could pause its interest rates crusade, but core CPI accelerating slightly might be the fly in the ointment. We’re diving into the economic outlook and if an interest rate hike is on the way now the last data set before the Fed makes its decision is here.
Most countries are grappling with the inflationary beast right now. Q.ai’s Portfolio Protection feature helps to guard against a volatile market. It uses AI to assess risks in your portfolio and uses hedging strategies to help keep your returns safe.
It’s available on all Q.ai Foundation Kits, which are themed on different topics and offer varying risk levels to satisfy any investor. AI powers the Kits by sifting through massive amounts of data to help find the top stocks, ETFs and other assets each week.
Download Q.ai today for access to AI-powered investment strategies.
What’s the latest inflation data?
Headline inflation rose by 5% annually, down slightly from the anticipated 5.1% figure and a hefty drop from February’s 6% result. It increased by 0.1% monthly, also down from analysts’ 0.2% prediction. This is the lowest figure in nearly two years and is a far cry from the 9.1% inflationary peak of June 2022.
The core consumer price index (CPI), which measures goods and services prices, has come in exactly on target at 5.6% year-on-year. The monthly forecasts predicted core CPI to rise 0.4% for March compared to February’s 0.5% increase. While the figure is bang on what experts predicted, it’s a small acceleration from February’s 5.5% figure which signals inflationary pressures are still strong in pockets of the market.
Households saw higher prices for food and housing. Energy prices, which soared a year ago thanks to Russia’s invasion of Ukraine, and used vehicle prices both decreased.
How has the market reacted?
Stocks have risen at the news that inflation is cooling off. The S&P 500 is up 0.4% while the Dow Jones Industrial Average has jumped 0.5%. Meanwhile, Treasury yields have begun to fall: the two-year yield is now sitting at 3.9% down from just over 4% before the figures were released, and the ten-year yield is now sitting at 3.35%.
This is a good sign of investor sentiment if stocks are up and Treasury yields are down – investors are feeling increasingly confident that inflation is steadily ticking downwards and that interest rate hikes could be coming to an end as soon as next month.
What’s the U.S. inflation picture now?
We also have a good picture of how the U.S. jobs market is currently performing. The Bureau of Labor Statistics released its unemployment report on Friday, revealing 236,000 new jobs were added in March and bringing the unemployment rate to 3.5%.
Paired with the ADP employment report for private sector payrolls coming in significantly below estimates at 145,000 and the gradual uptick in weekly unemployment claims, we’re looking at the jobs market releasing its stranglehold on high inflation.
Core PCE data (which excludes food and energy) for February was also released last week, coming in at a 0.3% rise. This improved the 0.4% expected increase and the 0.5% January figure.
This is all painting a rosier picture for investors. Rate pauses will ease pressure on consumer spending and businesses’ profits, send confidence back into the market and could put stocks on an upward trajectory again.
Could we see another interest rate rise?
Nobody envies Fed chair Jerome Powell’s task. Not enough action with base interest rates risks stagflation. Too aggressive, and disaster can strike: the collapse of Silicon Valley Bank showed that to be the case. The goal is to reach 2% inflation annually, but it’s a rock and a hard place.
This core CPI inflation result is particularly crucial because it’s the last major data set we’ll get before the Fed decides on interest rates in May. For the last couple of weeks, investors have been pricing in an anticipated further 25-point increase in interest rates, but no further.
Right now, there are two camps: those who think the Fed will pause interest rate hikes in May, and those who think there’s still room for another quarter-point increase. With these figures, it’s an even closer call. The core CPI figure is high enough for the Fed to still consider an increase, or they could look at the sharp decrease in headline inflation and hold off.
Another factor in a rate pause’s favor at the next meeting is that renting costs are easing off. It accounts for stubbornly high core CPI figures, but the results lag behind by almost a year. Meanwhile, grocery prices fell for the first time since September 2020.
What about the rest of the world?
The U.S. has a place on the global stage, where other developed economies are fighting similar inflationary pressures after the pandemic and the Ukraine conflict.
The International Monetary Fund (IMF) has downgraded its global outlook for the economy in 2023 and going into 2024, though it raised the U.S. forecast to 1.6% growth this year. The U.K. economy is still expected to shrink but only by 0.3% instead of 0.6%, but Germany’s economy has gone from a predicted 0.1% increase to a 0.1% fall.
Meanwhile, China’s inflation eased for a second month in March after reopening from length pandemic lockdowns. It’s a tentative sign the world power’s economy is recovering after a difficult few years.
The bottom line
There’s only a couple of weeks to go until we hear the Fed’s decision on interest rates, but today’s CPI data should be added to a wider picture rather than viewed in isolation. We’re looking at the jobs market slowing, payroll figures easing off, unemployment rising and core PCE down.
A pause in base interest rate hikes could be just the stimulus the stock market needs for consumer and business confidence to return and with them, returns rather than losses. But there’s no consensus on what the Fed might decide, so watch this space.
Inflation isn’t fun for any investor, so you might prefer a lower-risk strategy when times are tough. Q.ai’s Value Vault Kit uses AI to find the best value companies relative to earnings and cash flow, rebalanced each week for the best chance of making returns.
Don’t want to see your portfolio gains disappear in a downward spiral? Q.ai’s Portfolio Protection feature is unique to its Foundation Kits and rivals any hedge fund manager. It uses AI to assess any risks to your investments and deploys sophisticated hedging strategies to help ringfence your returns.
Download Q.ai today for access to AI-powered investment strategies.
Read the full article here
