12 April 2024
Whilst we have seen a plethora of economic data this week there can be no doubt that stealing the show was US inflation data. The annual rate increased for the second consecutive month in March, rising to 3.5%. This was above the February reading of 3.2% and above consensus forecast of 3.4%. Month on month we saw an increase of 0.4%. This was the same rate as that seen in February but was above the 0.3% forecast. There were two elements which were the key drivers behind this monthly increase, being shelter and gasoline.
Whilst inflation has clearly come a long way in its journey back to target, it appears to have hit the pause button. To be fair, it had been predicted by many that this could prove to be the case, with ‘sticky’ inflation, due to strength within the services sector and labour market in particular, likely to persist for longer. Volatility around inflation prints therefore, in terms of being above and below forecasts, was expected. Still, investment markets did not take too kindly to this miss to the upside. We saw falls across US equities markets on the day, especially the Russell 2000 small cap index, whilst bond yields rose. This filtered through other overseas markets, including the UK and Europe.
So if it was already thought that the last path to target would be more difficult, why did markets react in the way that they did? In a nutshell, it all comes down to expectations as to when the US Federal Reserve (the Fed) will make that first rate cut. Turning back to the start of the year, the first was forecast to come in March. That was quickly unwound and was pushed back to June. This latest print now brings this into question, with some commentators now believing that July could prove more likely. We know the central bank have a limited window this year as they will not want to act too close or on top of the Presidential election.
Concerns remain that the longer the Fed have to maintain interest rates at the current level, the greater the possibility that a harder economic landing will be felt. Higher for longer could also mean that that a crack appears somewhere, although we most likely wouldn’t know where in advance. Conversely, it may just be that the US economy can currently live with a higher level of interest rates than initially expected. Economic growth during 2023 certainly caught forecasters by surprise, and we have already seen the Fed and International Monetary Fund lift theirs forecasts for 2024 to just above 2%.
There are perhaps different paths opening up elsewhere. Whilst the European Central Bank again held on rates this week, with inflation now at 2.4% they are closer to target than others. In a statement released following this decision the bank confirmed that if their inflation outlook increased their confidence that it was moving to target in a sustained manner, then “it would be appropriate to reduce the current level of monetary policy restriction.” They reinforced that their decision would remain data dependent and refused to commit to a pre-defined path. However, it could be argued that they are perhaps closer to cutting than their US counterparts.
At the time of writing equity markets have shaken off the higher US inflation number and the FTSE 100 is trading above 8,000. Can a new closing all time high be achieved?
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