— This is the script of CNBC's news report for China's CCTV on April 11, 2024.
Looking at the market's most closely watched core inflation perspective, this is the third consecutive month that core CPI has exceeded expectations.
This is the third consecutive month that core CPI has exceeded expectations, which is also the market's most closely watched inflationary data. If we break down the readings, we can see that housing costs, which account for approximately one-third of the CPI weight, have driven the overall figure higher.
In March, housing costs rose by 0.4% month-on-month and 5.7% year-on-year. It is worth noting that it has been expected that costs related to housing will gradually slow down within this year, which has been a core basis for the Fed's forecast of inflation cooling sufficiently to allow rate cuts.
However, the latest inflation report dispelled the notion that the over-expected data from the first two months were merely outliers, and the market is now beginning to consider the possibility that the process of disinflation may have stalled.
Barbara Doran
BD8 Capital's CEO
"The inflation front, I think, surprised everybody and disappointed us. I mean, we were hoping January February had some seasonal or anomalous explanation. This just 'emm'… And it looks like it's stalled out for now."
The overheated inflation report also led to a downward revision in expectations for rate cuts. Richard Flynn of Charles Schwab used a vivid analogy, saying that it's normally like climbing stairs step by step when the Fed raises rates, and more like taking an elevator faster than stairs when cutting rates. However, in this round of rate cuts, it seems that the Fed may choose to take the stairs.
We can observe the market's bets on Fed interest rate policy from the CME FedWatch Tool. The latest data shows that the probability of the Fed cutting rates in June has plummeted from about 56% a day ago to about 17.8%.
Based on several market participants' opinions on CNBC's shows, most now believe that the timing for the Fed's first rate cut may be pushed back from June to July or even September, and the number of rate cuts may also decrease from the current expectation of three times. What is even more worrying for the market is that the Fed may not be prepared for the possibility of inflation striking back.
Krishna Guha|
Evercore ISI's vice chairman
"There's a real risk here that the Fed could end up getting scheduled from three to two to one, maybe even none. What worries me is what the Fed's Plan B looks like, it's not clear to me they have a good plan B."
Another major indicator of concern is Supercore inflation, which excludes housing and rental costs and better reflects inflation in the service sector.
The Supercore inflation in March increased by approximately 4.8% year-on-year, the highest level in 11 months. Analysts believe that factors currently stubbornly driving service sector inflation include car and housing insurance as well as property taxes, which have lower sensitivity to tightening monetary policy and therefore have more stickiness.
Dragged by the lower expectations for Fed rate cuts, 10-year Treasury yields rose overnight, and the three major U.S. stock indices all closed lower.
The market is now closely watching the upcoming release of the U.S. Producer Price Index (PPI) and the Personal Consumption Expenditures Price Index (PCE), which the Fed often emphasizes as its most important. If the PPI exceeds expectations again, it may indeed signal that the Fed's last mile of disinflation still faces challenges, and we will also keep a close eye on this.