Asia open: No tap dancing around inflation concerns

Markets

Tuesday saw U.S. stocks closing considerably lower as investors grappled with economic indicators indicating increasing labour costs and a decline in consumer confidence, all coming ahead of a crucial Federal Reserve policy meeting aimed at determining the trajectory of interest rates. Amid the toxic brew of data, bullish sentiment took a severe hit as a hotter-than-expected U.S. employment cost index, the Federal Reserve's preferred gauge of wage inflation, potentially dashed hopes for any rate cuts in 2024.

The unexpectedly sharp rise in the Employment Cost Index for the first quarter, revealed in Tuesday's update from the Bureau of Labor Statistics, is the most unwelcome news for doves. The index surged by 1.2%, surpassing consensus expectations and marking its most substantial increase in a year, suggesting a noteworthy acceleration in labour costs since Q3 2022. This development is anticipated to feature prominently in Jerome Powell's remarks during the upcoming FOMC press conference, underscoring policymakers' challenges amid a rapidly evolving inflationary landscape.

Tuesday's Employment Cost Index (ECI) release serves as a stark reminder of the pivotal role such data played in Jerome Powell's earlier shift towards a more hawkish stance. This shift notably marked the Fed's departure from characterizing inflation as "transitory."

The latest figures, particularly the notable year-on-year increases in wages and salaries for both all workers (4.4%) and private sector workers (4.3%), strongly suggest that the case for rate cuts in 2024 is significantly weakened

The data delivers a straightforward message: the US economy isn't showing signs of rapidly slowing inflation. These numbers essentially bury any hopes for imminent rate cuts, unless, of course, a significant shift occurs such as a negative Non-Farm Payrolls print. Overall, this data provides little support for the Fed to consider rate cuts shortly, signalling a need for more convincing evidence to prompt such action.

Bittering the brew further, consumer’s perception of the US economy took another hit in April, marking the third consecutive month of decline. The Conference Board's index of consumer sentiment, coming in at 97, fell well short of expectations and reached its lowest level since the summer of 2022. This disappointing update, with March's headline also revised downward, suggests growing concerns among consumers about the state of the economy.

The Expectations gauge, printing at a dismal 66.4, is among the lowest readings since the financial crisis, which is cause for concern. It's worth noting that any reading below 80 on this measure is historically associated with a recession over the following 12 months. However, it's important to acknowledge that this gauge has issued several false alarms since the Federal Reserve began raising rates two years ago.

But the problem with inflation is that there is no tap dancing around it. The primary concern for consumers is inflation, particularly elevated prices for essentials like food and gas. According to Dana Peterson, chief economist at the Conference Board, political issues and global conflicts were distant secondary concerns compared to price pressures.

The combination of rising interest rates, postponed Fed rate cuts, and relentless inflation trends is dampening consumers' willingness and ability to spend.

In summary: The question of whether equity bulls can maintain confidence in the absence of easing measures this year becomes increasingly relevant, especially if the Fed delays rate cuts until 2025. Today's market movements may provide some insight into how investors are reacting to this possibility.

The macro landscape remains precarious, with each data release keeping investors on edge. We're still getting further away from the slow and predictable disinflation scenario the Fed needs to see to warrant rate cuts.