Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning, 16/05/2024:
What has happened
Markets enjoyed a reignited rally yesterday following a warmly-received US Consumer Price Index (CPI) report which for once avoided any nasty surprises. Hopes for US interest rate cuts later this year were also buoyed by the latest US retail sales data for April, where the annual rate dropped to +3.0%, and weaker than expected. On both sides of the Atlantic yesterday, the US S&P500 and the pan-European STOXX600 equity indices both hit fresh all-time highs.
Latest US consumer inflation data lands
The latest (April) monthly US CPI report landed yesterday. The annual all-items CPI rate came in at +3.4% for April, down from +3.5% back in March. The core (excluding energy and food) CPI annual rate came in at 3.6% for April, down from 3.8% back in March. For both the all-items and the core rates of annual inflation, these were in-line with market expectations. Importantly, the annual core rate of inflation was the lowest reading in 2 years.
Market expectations for US Federal Reserve cuts up to two this year
On the back of the US CPI data, yesterday saw markets raise their expectations for Fed rate cuts later this year. For calendar 2024 as a whole, yesterday saw markets price in a cumulative -0.52% of cuts by the Fed’s December meeting, up +9 basis points, so once again pricing in a full two quarter-percentage-point cuts. For context, markets have had quite the ‘expectations journey’ so far this year. At the start of 2024, markets were pricing in more than 6 cuts each of -0.25% from the Fed. Lately this had dropped to less than 2 such-cuts. As for when the first Fed cut might come, markets yesterday raised the probability of a rate cut by the Fed’s September meeting to 61%, up from 50% the day before.
What does Brooks Macdonald think
As is so often the case, the devil is in the detail. Digging into yesterday’s US CPI report, the Month-on-Month (MoM) data gave investors some grounds for cautious optimism. Core services inflation slowed from +0.5% in March to +0.4% MoM in April, while core goods inflation remained negative at -0.1% MoM. Importantly, there was also a deceleration in shelter rents, which fell from +0.5% in March to +0.4% in April MoM. All in all, the US CPI data yesterday was a step in the right direction, and especially so following the previous four monthly CPI reports which had all been a bit hotter-than-expected. That said, further progress on inflation is likely going to be needed over the coming months in order to win over the US Federal Reserve and give them the confidence they need to finally start cutting interest rates.
Bloomberg as at 16/05/2024. TR denotes Net Total Return.
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Charlotte Clarke
16/05/2024