The data released by the US Department of Labor on Tuesday showed that inflation in the United States exceeded expectations again last month. Although this data has hardly changed the market's judgment that the Federal Reserve will start cutting interest rates later this year, it is indeed making the current situation of the Federal Reserve more complex
According to a report from the US Department of Labor, the Consumer Price Index (CPI) in February increased by 3.2% year-on-year, higher than economists had anticipated by 3.1%. The CPI rose by 0.4% month on month in February, the largest increase since September last year.
At the same time, the core CPI excluding food and energy projects increased by 0.4% compared to January, which is also higher than economists' expectations of 0.3%. The core CPI has increased by 3.8% compared to the same period last year, although this is the smallest increase since 2021, it still extinguishes the hope that stronger than expected inflation in January was just a small episode.
Renowned journalist Nick Timiraos, known as the "New Federal Reserve News Agency," said that the US inflation rate has exceeded expectations for the second consecutive month and may strengthen the central bank's wait-and-see attitude towards rate cuts at next week's Federal Reserve rate meeting.
Since the beginning of this year, the US stock market has risen comprehensively, as investors generally believe that the Federal Reserve will cut interest rates within the year, and macro factors have a relatively positive impact on the stock market as a whole. After the unexpected CPI report was released on Tuesday, the stock market still stubbornly rose, indicating that investors also believe that the interest rate cut process in June has not yet derailed. The S&P 500 index ended the previous two days of consecutive declines on the same day, setting a 17th closing record for the year.
According to data from FedWatch, the overnight bet by federal fund futures traders on the probability of the Federal Reserve cutting interest rates in June has only slightly decreased from 72% on Monday to 69%.
However, this report may indeed make the Federal Reserve's next review process difficult to ease. To better track inflation trends, excluding core price increases in food and energy that exceed expectations - both year-on-year and month on month indicators - this phenomenon may be enough to trigger the Federal Reserve's high attention.
In fact, apart from the enthusiastic stock market, other sectors of the global financial market reacted relatively more pessimistically to this CPI report overnight.
The most obvious is undoubtedly the bond market. The prices of US Treasuries were under pressure overnight as a whole, and the yields of treasury bond bonds of all maturities rose in succession. The performance of CPI data in February triggered concerns that if the price pressure is still high, the Federal Reserve may not be able to successfully cut interest rates for many times in the year as expected by investors.
As of the end of the New York session, the 2-year US Treasury yield increased by 4.6 basis points to 4.595%, the 5-year US Treasury yield increased by 6.5 basis points to 4.157%, the 10-year US Treasury yield increased by 5.9 basis points to 4.16%, and the 30-year US Treasury yield increased by 5.3 basis points to 4.316%.
Recently, gold, which has continuously set a record high in history, also stopped its eight consecutive gains overnight. COMEX April gold futures closed 1.03% lower at $2166.1 per ounce, marking the first decline in the past nine trading days and falling to a seven day closing high.
The next focus may be on the Federal Reserve's dot matrix?
Barclays Bank's US economist Pooja Sriram said Tuesday's report "may lower the Federal Reserve's confidence in inflation approaching its 2% target quickly.".
Regarding this, Nick Timiraos, the "New Federal Reserve News Agency", believes that when Federal Reserve officials meet next week, a key focus will be their interest rate chart - will most officials continue to expect three rate cuts this year, or will more officials turn to thinking that only two rate cuts are needed?
Timiraos pointed out that although dot matrix predictions are not a product of the FOMC review, during periods when the Federal Reserve does not change interest rates or significantly modify policy statements, dot matrix predictions often have significant implications in influencing public expectations - a situation that may occur again next week.
Timiraos stated that Federal Reserve Chairman Powell had stated that in order for the Fed to start cutting interest rates later this year, inflation data may not necessarily need to improve from the mild data at the end of last year. But a big question is, to what extent does the overall CPI increase by 0.4% month on month in the first two months of this year represent a "regression" of the downward trend in inflation.
Industry analyst Chris Anstey also stated that the February CPI data in the United States increased the risk of Federal Reserve officials collectively changing the expected three rate cuts in December last year to two rate cuts within the year. The median estimate of the benchmark interest rate at the end of 2024 on the chart will be the first thing people need to look for.
PIMCO Managing Director and Economist Tiffany Wilding pointed out, "In terms of its impact on the Federal Reserve, although Tuesday's CPI report itself may not be enough to prevent the Fed from cutting interest rates mid year, it should raise the real question of how much inflation can return to target levels if the labor market does not loosen further."
Of course, there are still some industry insiders who believe that the situation of three interest rate cuts within the year will not be easily changed. Former Boston Fed Chairman Rosengren stated on Tuesday that the Labor Department's report should not fundamentally change expectations for three rate cuts this year, which was also a plan made by officials at the December meeting.
Rosengren said in an interview that Tuesday's report basically indicates that core inflation is gradually improving. As long as wages and salaries continue to decline, I don't think this report will truly change the overall view that interest rates may be lowered in June.
Rosengren stated that he personally prefers the Federal Reserve to lower interest rates at its meeting in early May, as there are indications that the degree of economic cooling has exceeded the main indicators so far. But he said he believes Federal Reserve officials will wait until June to cut interest rates for the first time, in order to have more confidence in the target of restoring inflation to 2%.