The US CPI report for April was mostly in line with expectations. The annual rate for headline price growth fell to 3.4% from 3.5%, while the core rate declined to 3.6% from 3.8%. This is noteworthy because the core rate of inflation is at its lowest level for three years and headline prices seem to have stabilized. Monthly rates of price growth also moderated a touch more than expected, with both core and headline MoM rates of inflation rising by 0.3%, the slowest rate of growth since January. This data gives some hope that price growth is moderating. However, since it was mostly in line with expectations, we believe that the focus is likely to be the weaker than expected retail sales for April, which suggests that the US consumer could be reigning in spending as we move into Q2.  

Retail Sales add to pressure on Fed to cut rates

Advanced retail sales were flat last month, while core retail sales, which strip out autos and gas, fell by 0.1% on the month. Retail sales were very strong in February and March, so some pullback is to be expected, and one month’s worth of data does not mean that the US consumer is cracking under the pressure of higher interest rates, but it is something to watch.

2-year Treasury bond yields have plunged on the back of this double whammy of data, and are currently down 8 basis points, to their lowest level since early April. The dollar index is also extending its decline and is back below 105.00. The market reaction to this data seems to suggest that expectations for Fed rate cuts will be pushed forward, as inflation is slowing at the same time as the US consumer starts to look shaky.

There has been an immediate re-pricing when it comes to Fed rate cut expectations. The CME Fedwatch tool is now expecting a 30% chance of a 25bp rate cut in July, up from a 26% chance of a cut yesterday. The market is now expecting the first rate cut to come in September, with a more than 50% chance of a cut currently priced in, up from a 48% chance last week.  

Inflation report details

Digging into the details of the US CPI data, service sector inflation slowed, rising by 0.4%, the slowest gain since December 2023. Housing costs also rose by 0.2%, compared with 0.4% in March, while owner equivalent rents stayed stable at 0.4% monthly growth. Food and beverage prices were flat, transport price growth also moderated, while the price for new vehicles declined by 0.4% last month, marking three months of declines in the price of new vehicles. Used car and truck prices also fell sharply, they were down 1.4% in March, and are lower by 6.9% in the past year.

US disinflation trend back on track

Lower airline fares, which had been flagged in the PPI data for April, also came in lower, they were down 0.8% on the month and are lower by 5.8% compared with a year ago. Recreation costs, education costs and the price of commodities excluding food and drink rose a touch last month, but this data clearly suggests that the disinflation trend is intact in the US.

Sticky components of inflation, for example shelter costs remain elevated, but the moderation in price growth in housing costs may impact rental costs down the line. Added to this, Federal Reserve Chair, Jerome Powell, has said that new rental leases, which have seen lower rates of price growth, are not yet filtering through to the CPI data. Once that starts to happen, then we could see shelter inflation start to moderate at a faster pace.

Super core inflation is still a fly in the ointment for the Fed, it is rising at a 4.8% annual rate, as rental and OER costs remain high. Services are still driving CPI growth in the US, as core goods prices declined last month, energy prices rose by just under 0.2% and food price growth is less than 0.3% higher than a year ago.

Risk-friendly economic data

The market is now pricing in two full rate cuts from the Fed this year, which was not the case on Tuesday. Thus, today’s economic data has moved the dial on Fed rate cut expectations. This is a market-friendly report, which supports the Fed’s view that rates will be cut once there is evidence that inflation is falling back to the target rate. If we see another couple of CPI reports that continues in this trend, then a late summer rate cut could be in the cards.

This report is risk positive, and US stock index futures are sharply higher, suggesting that a new record high for the S&P 500 could be on the cards for Wednesday.

Could the Fed cut rates in the summer, to avoid election fall out?

It is worth mentioning that if US economic data plays ball, then the timing of the US election is supportive of a July rate cut. The US Presidential election takes place in November. The Fed is independent and apolitical, however, by being apolitical they must be very careful to make sure that their decisions do not have any political impact. If the Fed was to cut rates in September, the Fed’s last meeting before the US Presidential election, then this could be considered pro- President Biden, as a cut in interest rates could be seen as a sweetener for voters. Thus, if the Fed wants to cut rates in the coming months then July could be one way to avoid political scrutiny.

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