The Fed Will Stay Dovish

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S&P 500 and Nasdaq Composite indices surged to record highs on Wednesday, building on their robust performance throughout 2024. The market rally was fueled by a U.S. consumer inflation report that came in lighter than expected.
Investor sentiment improved as data showed a smaller-than-expected rise in consumer prices, boosting equities to new highs.The Consumer Price Index (CPI) for April showed a 0.3% increase over the previous month and a 3.4% rise compared to the prior year, signalling a deceleration from March. Core inflation, which excludes the volatile components of food and gas, is also moderated.The relatively subdued inflation reading prompted a decline in the yield of the 10-year Treasury (^TNX) by 4.35%, reaching its lowest level in a month. This move sparked renewed speculation among investors about potential Federal Reserve rate cuts, with expectations rising for cuts as soon as September. According to the CME FedWatch Tool, approximately 70% of traders now anticipate at least one rate cut by the September meeting, marking a significant increase from just a week ago. Chart Via CME FedWatch Tool
And reminding us of the perils of remaining in data-dependent mode, the release included revisions dating back several years. Hence making immediate investment decisions on current data raises questions about the reliability of such precision, especially considering the likelihood of subsequent revisions that could alter the entire series.Still, the emergence of disinflationary pressures in the United States, reminiscent of trends observed around this time last year, is becoming apparent in the latest Consumer Price Index (CPI) print. Similar to 2023, core services (represented by the blue line) are showing signs of slowing down as the effects of start-of-year price resets fade. The Fed will stay dovish(Chart Via Robin Brooks @robin_j_brooks )
And OER printed a relatively benign 0.34051% for April. That was the lowest since August of 2021 and not too far off pre-pandemic levels.Via @steveinnes123. H/T @RealAlpineMacroAs to the CPI-derived “supercore” measures, core services ex-shelter printed 0.464% and 0.422% ex-OER/rent. Those were marked downshifts versus March’s sequential readings.The Fed uses a PCE-derived version of the “supercore” aggregate, but in lieu of that update (two weeks from now) markets can take comfort in the “cool” “supercore”
reading.Wednesday’s retail sales release further underscores concerns about the strength of the US consumption impulse at the start of the second quarter. When viewed alongside disappointing Non-Farm Payrolls (NFP) numbers, contractionary ISM prints, subdued sentiment indicators, and the relatively tepid core CPI reading for April, the implications for the Federal Reserve’s monetary policy stance appear decidedly dovish.In summary, today’s key tier one reports provide traders and investors with a justification to increase asset prices, which is often the case in the modern-day stock market operator playbook on any moderately dovish data readthrough.More By This Author:PPI To Test The Soft Landing Narrative
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