Wall Street's Reaction to Weaker CPI Print: "Trifecta Of Dovish News... Consistent With Fed Cutting In September"
Interpreting the CPI Report
The CPI report exceeded expectations on three out of four closely monitored metrics, with the headline CPI coming in at 0.3%, just below the anticipated 0.4%. However, the retail sales print was significantly worse, missing across the board. This has sparked a debate among commentators about whether this inflation report is sufficient to prompt an earlier rate cut. The general consensus seems to be that this print is enough to keep the possibility of a rate cut in September, if not July, alive.
Insights from Wall Street Economists and Strategists
Several active Wall Street economists and strategists have already provided their initial reactions to the CPI print. Here are some of their comments:
Neil Birrell, CIO at Premier Miton Investors
"The usual excitement over US inflation ended up being a damp squib, as it came in exactly as expected. However, retail sales were weaker than expected and the core rate is back to levels not seen for quite some time, which might well see optimists calling for rate cuts and markets rallying.”
Capital Economics
"Core CPI was even better than it looked, particularly given that we already know the PPI components that feed into the Fed’s preferred PCE deflator measure came in, on balance, weaker than expected. We estimate that core PCE increased by around 0.20%m/m. All things considered, this is consistent with the Fed cutting interest rates in September."
David Russell, Global Head of Market Strategy at TradeStation
"Shelter didn’t ease as hoped, but there was improvement in transportation and healthcare. The number wasn’t perfect, but we’re staggering toward lower inflation. Weaker data on retail sales and the Empire Index also suggest growth is slowing, which keeps rate cuts on the table. It was a trifecta of dovish news."
Nick "Nikileaks" Timiraos, WSJ resident Fed leaker
"One good print can't offset three unfavorable ones. It may take a couple more for officials to get over the PTSD of the Q1 inflation. It reduces the risk of any shift to a neutral bias (ie, open the door to hikes)."
Florian Lepo, Lombard Odier Asset Management
“With this in-line inflation print, rates are likely to break the [4.4%] level, dragged down by real rates. With that, the dollar should fall, supporting most assets labeled in it.”
Rubeela Farooqi, chief US economist at High Frequency Economics
“Overall, price pressures remain elevated but are moving in the right direction. We think the data support the case for a patient approach on policy decisions from the Fed going forward although the base case remains one of lower rates this year.”
Gregory Faranello, head of US rates for AmeriVet Securities
“Fed friendly data for the most part with both the CPI and retail sales. Both indicate a tempering which is what the Fed is looking for. These numbers support Chair Powell’s notion of ‘higher for longer’ to potentially lower.”
Ira Jersey, head of rates at Bloomberg
“The relief-rally knee-jerk reaction may be more about retail sales slowing meaningfully than the close-to-expected CPI. Sales have tended to lead goods CPI by a few months. The CPI report being pretty close to consensus underlines the continuing trend of lower-volatility core CPI sectors contributing nearly 4% on a year-on-year basis, while higher-volatility ones (right now generally goods sectors) contribute nothing. So although the data was broadly in line, inflation continues to run above the Fed’s comfort level, meaning near-term rate cuts aren’t likely.”
What's your take?
The interpretations of the CPI report and its implications for the Fed's future actions are varied. It's an intriguing situation, and one that could have significant implications for the economy. What do you think about this? Share your thoughts with your friends and sign up for the Daily Briefing, which is delivered every day at 6pm.
