Consumer prices rose 0.4% month-over-month in March, 3.5% from last year, according to the latest Consumer Price Index report. Both prints were hotter than economists had been expecting. The report caused stock futures to plummet and, for many traders, take a June rate cut from the Federal Reserve off the table.
EY Chief Economist Greg Daco called the report "somewhat disappointing." However, he points out that some of the big increases came from things like auto insurance and medical services, areas that the Fed has less control over. "There's no denying that this firmer inflation print does put more pressure on policymakers to sustain, likely, a higher-for-longer type of monetary policy stance," Daco says. He also notes "The first two months of the year were extremely noisy. We have to be careful not to factor that in too much, just like we should not have factored in too much the very rapid disinflation that we had at the end of last year."
Crossmark Global Investments Chief Market Strategist Victoria Fernandez says the report is "basically telling the Federal Reserve they are not getting that consistent, downward movement towards 2% that they want to see" and that it will put pressure on the Fed to "keep rates at an elevated level."
Watch the video above to hear how Fernandez is advising clients to play the markets now.
Greg, first and foremost, I want to go to you here, as you're sitting here in studio with us. One of the huge things that we were talking about even before this report dropped, I mean, would it be a dud? Would it be a nothing burger? I was playing white noise by disclosure before we started just to give us a sense of what we might be coming into. How would you describe it at this juncture?
Now, there's no denying that this firmer inflation print does put more pressure on policymakers to sustain likely a higher for longer type of monetary policy stance. So I think we're going to hear more and more concern around the onset of the easing cycle in June.
- Victoria, what are your thoughts just about what this print, the third hotter-than-expected print that we've seen here for CPI? What does that then tell us about the likelihood that maybe we aren't going to see three cuts before the end of the year?
VICTORIA FERNANDEZ: Yeah. So Seana, I think it's important that it is the third month in a row that we've seen this. You know when you look historically, a lot of people like to look at a three month average. So our three month average is actually moving higher. We saw that in the PCE as well, especially in the super core. PCE on an annualized basis that was moving higher from 3 and 6 month levels.
So, you know, Powell said at the last meeting, it was seasonality for the January numbers. They weren't too concerned about February. Well, now you've got the third month in a row. So I do think there's going to be some concern around that. It's basically telling the Federal Reserve they're not getting that consistent downward movement towards 2% that they want to see. And granted, as Greg said, maybe they don't have control over some of these elements that are there, but it still puts pressure on them to keep rates in an elevated level.
Let's look at what the 10-year yield has done just in the last couple of minutes we've jumped, what, 10, 11 basis points. So I think you can see futures market is pricing out rate cuts. I don't think we're going to see three, Seana, three rate cuts this year. You already had Fed members come out saying, one, maybe two, maybe none. We'll see how more-- how much more hawkish they get after today's report as well, but I do think we need to dive into the numbers a little bit more to get a better read on what they're going to be looking at.
- Yeah, Greg, I saw you shaking your head here. To what extent do you disagree?
GREG DACO: Well, I think we have to be careful in what's driving inflation. This is very important to monitor. If you look at core goods, down 0.2%. That's still a very disinflationary reading. You look at core services and you look at shelter costs, that has been a key area of concern. That is easing. 0.4% month over month is not a concern. Hotel prices, flat. Airfares, falling back. The first two months of the year were extremely noisy. We have to be careful not to factor that in too much, just like we should not have factored in too much the very rapid disinflation that we had at the end of last year.
- Victoria, I want to get your thoughts on we spoke to Atlanta Fed President Raphael Bostic yesterday in an exclusive interview he had with our Fed reporter Jennifer Schoenberg about his current projection this was ahead of this print. But what do you have to say about his expectation for rate cuts this year? I want to play that clip and then get your reaction.
RAPHAEL BOSTIC: Ultimately, it will just depend on what the data show. But I do think the risks are balanced. And given that the US economy has been so robust and so strong and so resilient, it can't take off the possibility that the rate cuts may even have to move further out.
- So, Victoria, given the fact that that was-- what do you have to say ahead of this print? And given the reaction that we're seeing in the markets right now, you've got all three of the major averages on track, at least it looks like, to open the day off over 1%. If we don't see the Fed cut three times this year, how much more pressure do you think we could see on equities here, at least in the short term?
VICTORIA FERNANDEZ: Yeah. I mean, look, it's all going to come down to how far we see yields move and what kind of pressure that puts on PEs for the equity market. I mean, we're at, what, 21, 21.5 times. That's going to have to come down a little bit. So there's going to be some pressure. A lot of it relies on earnings as well. It's not just all sitting on the shoulders of the Fed and what they do with rate cuts. I think earnings is going to be a key component as well. We know that starts on Friday with the banks.
But the longer that we keep rates at this higher level, right now, the economy is able to swallow that and we're seeing that with GDP estimates still moving higher. But the longer we're there, the longer pressure-- more pressure it puts on the consumer, the more pressure it puts on the labor market. When we start to see cracks there, that will feed through into earnings. So it all feeds off of each other.
I think Bostic is right that it could lead to no rate cuts this year again. That will force yields higher. It will put some pressure on equity markets. How much? We have to wait and see. A lot of that still depends on the demand and the consumer spending that we're seeing. BofA did come out today with their consumer report showing that some spending has come down. So maybe in the second half of this year, we're going to start to see more of the effects of the rate hike so far play through into the equity markets.
- How early do you think we could see a cut this year? What is the Fed's tenor shift towards at the next meeting?
GREG DACO: Well, I think we have to be very careful with this idea that it's a play-by-play type of decision making process.
- Sure. They're not running color commentary like a sports game.
GREG DACO: And that's very important to keep in mind, because there is that impression, investors have taken that impression, that Fed policymakers are doing it on a play-by-play basis. Every time there's a new data release, whether it's important or not, there's massive market shifts in terms of the pricing of Fed expectations. What the Fed is really intent on doing is getting inflation comfortably and sustainably down to 2% for the PCE indicator.
We are moving in that direction. These types of readings do still point towards disinflationary pressures. It's not as rapid as what we saw last year, But it is still moving in the right direction and it's going to take time. I still think that there is this possibility that the Fed will still ease three times this year. Perhaps it will wait a little bit longer than June because it does not have sufficient confidence to start the easing cycle, but I don't think we should price out all the rate cuts because we are in an economy that is gradually slowing, where the labor market is gradually cooling, and where inflationary pressures continue to ease.
- By the way, I'm just taking a look here briefly at the CME FedWatch tool. 72% now staying at the current rate for June is where the probability has jumped to at this point in time. Victoria, what type of trade does that initiate for you in your mind coming off of a report like this?
VICTORIA FERNANDEZ: Yeah. Well, I think, look, when we're investing for our clients right now, we want them to be fully invested in the equity market. But they have to be cautious about where they're putting their money to work because we do think you will probably see a pullback. We haven't seen that 2% pullback that you typically see for quite a long period of time. And in an election year, you typically see low double digit pullbacks.
So we would be cautious. And where we're putting money to work, we would be diversified and put some money to work at these yields in the fixed income markets as well. You can do a barbell on the short end and the long end to take advantage of where those yields are, because we probably are getting closer to the higher end of the trading range for yields. Maybe they go a little bit higher, but I don't think we'll go significantly higher from where we are. So you can position yourself to take advantage of when the Fed does start to cut rates, you can get some positive change there in your portfolio value.
So we stay invested. The trade for us is to be there, to be cautious in what we're investing in, and to take advantage of some of the yields we're seeing in the fixed income markets.
- All right, we got to leave it there. Victoria Fernandez and Greg Daco, thanks so much for taking the time to hop on and react to this hotter than expected inflation print.
