As the rise in US inflation has punctured the zeal of US market bulls, economists believe investors should be ready to see a longer-than-expected delay in rate cut by the US Federal Reserve.
US consumer inflation slowed less than anticipated last month, according to government data. The closely watched Consumer Price Index rose 3.1 percent from a year ago in January, down from 3.4 percent in December, the Department of Labor said.
“Even as the headline was up above 3 percent, core inflation for Jan'24 came in much hotter than expected, demonstrating that the last mile of disinflation remains bumpy, and pushing out markets' rate cut expectations beyond May and even June,” said Madhavi Arora, lead economist at Emkay Global.
She added that volatility and repricing trade is back in the game.
The markets have been pricing a rate cut in May as US inflation was on a downward trajectory. This also led to S&P breaking above 5,000 level for the first time ever. However the latest datapoint will likely disappoint the market.
On February 13, the Dow Jones Industrial Average lost 491 points, or 1.3 percent. Earlier in the day, it had slipped more than 500 points – its biggest drop since March 2023. The S&P 500 slid 1.1 percent, and the Nasdaq Composite fell 1.2 percent.
“We stay prepared with more fluidity in the market and Fed actions. We have been arguing the last mile will be the most difficult one, especially with labour and housing being structural mismatch problems,” Arora said.
She warned that one should watch out for consistent repricing of cuts and said we shouldn't be surprised if we see a shallow and delayed rate response this year.
The US 2-year bonds and US 10-year bonds are trading 13-15 bps higher, and the DXY is 0.4 percent higher. Market pricing for a May rate cut is now down to 37 percent, from 60 percent yesterday.
“While one data point does not make a trend, combined with several leading indicators, this print does show that inflation is not yet tamed. Goods disinflation has legs, but services inflation needs to fall much more to bring down overall CPI,” Arora said.
Fed had earlier ruled out a March rate cut citing there was still need of more confidence in inflation data.
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