For the first time since June 2020, the Consumer Price Index (CPI) report will be released on the same day as the Federal Open Market Committee (FOMC) meeting, setting the stage for a potentially volatile Wednesday for financial markets. The alignment of these two significant events has garnered considerable attention, as their outcomes could substantially impact market dynamics and Federal Reserve policies.
Recent Inflation Trends and Market Reactions
The first quarter of 2024 witnessed three consecutive months of higher-than-expected inflation readings, stirring concerns among investors and policymakers about the persistence of inflationary pressures. These readings suggested that inflation might be more entrenched than previously thought, prompting speculation about the Federal Reserve’s next steps in its monetary policy. However, April’s CPI data offered some respite, showing an easing in price pressures that aligned with forecasts. This shift suggested that inflationary pressures might be abating, which is crucial for the Federal Reserve’s goal of achieving a 2% inflation target.
The May inflation report, due from the Bureau of Labor Statistics at 8:30 a.m. on Wednesday, holds significant importance. It will be pivotal in determining whether the easing of inflation seen in April continues, potentially supporting hopes of reaching the Federal Reserve’s inflation target. The outcome of this report will also heavily influence Fed Chair Jerome Powell’s stance during his press conference on the same day. A softer inflation reading could bolster the case for interest rate cuts later this year, while a higher-than-expected figure might necessitate a more aggressive monetary policy, possibly keeping rates high for longer.
Market Expectations and Economic Forecasts
Currently, market participants estimate a 50-50 chance of a rate cut in September, with expectations of only one fully priced rate cut by year-end. The consensus among economists, as compiled by Econoday, forecasts that the headline annual inflation rate will hold steady at 3.4%. On a monthly basis, the overall CPI is expected to advance by 0.1%, down from April’s 0.3% rise. The core annual inflation rate, which excludes volatile food and energy prices, is projected to remain at 3.6%, with a monthly advance of 0.3%, unchanged from April.
Goldman Sachs economist Manuel Abecasis anticipates a slower pace of inflation in sectors such as consumer electronics and personal care, reflecting in the May data. He also predicts a continued rise in car insurance prices, albeit at a slower pace, and stable rent and Owner’s Equivalent Rent (OER) inflation rates. “Going forward, we expect monthly core CPI inflation to remain in the 0.2-0.3% range for the next few months before settling around 0.2% by end-2024. We forecast year-over-year core CPI inflation of 3.5% and core PCE inflation of 2.8% in December 2024,” Abecasis stated.
Prominent veteran market analyst Ed Yardeni believes the May CPI report will confirm ongoing moderation in inflation. “The Cleveland Fed’s Inflation Nowcasting model shows headline and core CPI rose 3.36% and 3.55% year-over-year in May, which would be the lowest annual core inflation reading since April 2021,” he noted. Yardeni also expects a decline in shelter inflation and used car prices, with hopes that other auto-related consumer prices will stabilize.
Bank of America’s economist Michael Gapen sees the May report continuing the positive trend from April. “After averaging 0.4% month-over-month from January through March, inflation took a step in the right direction in April. We expect core and headline CPI at 0.3% and 0.1% month-over-month for May, respectively, keeping annual rates unchanged from April at 3.6% and 3.4%,” Gapen commented.
Historical Market Reactions to CPI Reports
The release of April’s CPI report on May 15, 2024, triggered rallies across various asset classes. The S&P 500, tracked by the SPDR S&P 500 ETF Trust (NYSE
), rose by 1.2% on that day. The tech-heavy Nasdaq 100, monitored through the Invesco QQQ Trust (NASDAQ
), rallied 1.6%. Long-dated bond yields fell, pushing the iShares 20+ Year Treasury Bond ETF (NASDAQ
) up by 1.4%. Gold, tracked by the SPDR Gold Trust (NYSE
), rose 1.3%. Bitcoin (CRYPTO: BTC) saw a significant surge of 7.4%, marking its strongest day in two months and the third strongest year-to-date. A measure of the dollar, as gauged by the Invesco DB USD Index Bullish Fund ETF (NYSE
), fell 0.7%, recording its worst one-day performance since mid-December 2023.
The FOMC Meeting: Anticipated Outcomes and Implications
The FOMC meeting, occurring concurrently with the CPI report release, adds another layer of complexity to market dynamics. Market participants will closely watch the Fed’s decision on interest rates and its forward guidance. While the consensus suggests that the Fed might hold rates steady in June, the language used in the statement and during Chair Powell’s press conference will be crucial in signaling the Fed’s future actions.
A softer CPI reading could reinforce the case for the Fed to adopt a more dovish stance, potentially hinting at future rate cuts if inflation continues to trend downward. Conversely, a higher-than-expected CPI could compel the Fed to maintain a more hawkish posture, emphasizing the need to keep rates higher for longer to combat persistent inflation.
Market participants will be particularly attentive to any hints from the Fed regarding the balance of risks between inflation and economic growth. If the Fed signals concerns about slowing growth, it might be more inclined to ease monetary policy despite lingering inflationary pressures. On the other hand, if inflation remains the primary concern, the Fed might prioritize price stability over growth, leading to a more prolonged period of higher interest rates.
Looking Ahead: Implications for Markets and Monetary Policy
The confluence of the CPI report and the FOMC meeting heightens the stakes for financial markets. The May inflation data will provide critical insights into the direction of price pressures and influence the Federal Reserve’s policy trajectory. Market participants will closely watch Fed Chair Jerome Powell’s comments for any signals regarding future rate adjustments.
In summary, the simultaneous release of the CPI report and the FOMC meeting outcome on Wednesday could lead to significant market volatility. Investors and analysts will scrutinize the data and Fed statements to gauge the future path of inflation and interest rates. With the potential for significant market movements, this day could be a turning point in shaping the economic outlook for the remainder of the year.