So, no June rate cut from the Fed. A move at the next SEP meeting was already looking unlikely. Wednesday’s CPI report all but ruled it out.
Maybe a June cut was always a fantasy. The US economy has a lot of underlying momentum, after all. Too much, probably, for services sector price growth to cool any further.
Now that the data has thoroughly disabused policymakers of their dovish daydreams, it’s worth recalling that at one point early this year, a March cut was almost fully priced. Fast forward three months and here we are staring at market pricing which reflects less than 50bps of easing for 2024.
We’ve come a long, long way from January’s dovish extremes, haven’t we? From more than six quarter-point reductions expected to fewer than two priced.
As the familiar figure above (updated for Wednesday) suggests, this is gut check time for an equity rally which managed to decouple entirely from 2024 rate-cut wagers.
If you read the latest Weekly, you were well prepared. “The question was always how risk assets would respond in the event the economy performed so well that rate cuts became impossible to rationalize, particularly in the context of core inflation lingering closer to 3% than 2%,” I wrote. “We’re about to get an answer.”
The initial verdict from equities is likely to be a Gladiator-style thumbs down, which is to say if stocks were waiting for an excuse to correct, this (the combination of a third straight core CPI overshoot and an acceleration of the hawkish repricing across the US rates complex) is surely it.
The front-end was bludgeoned Wednesday. Twos were cheaper by 21bps, threes by 22bps in the hours after the CPI release. It was the most acute front-end selloff of 2024 and it bear flattened the curve fairly dramatically.
There’s no scheduled data release between now and the next US jobs report with enough heft to offset the combined hawkish gravity of last week’s blockbuster NFP headline and this week’s CPI overshoot.
A benign read on PCE prices later this month would help, but considering the advance read on Q1 GDP’s very likely to be robust, the repricing in rates will probably “stick” absent some left-field shock.
Suffice to say the fate of the equity rally hangs on Q1 earnings season — the “fundamentals,” as it were.
I benefit from this color provided here regarding CPI print. While the CPI print was covered in all media, linking this to market moves in rates is a unique and helpful illustration. I am not able to discern the actual effect from normal news feeds. I understand it is Dopamine inducing entertainment. However, it helps me stay invested in the correct way.
You have shown us a beautiful chart – most recently today – that shows a widening spread between equities and rates that seems very extreme to me. I think this begs a correction – why not? History shows that strong industrial growth – on-shoring for instance – is correlated with falling equity markets. Considering the cousin of Volmageddon, in several different disguises, out there, why can’t a data ‘twitch’ or an offshore crisis / setback or a House screw-up start a sharp reversal, Things are certainly more out of whack than 1987, aren’t they?
RUT getting brutally kneecapped.