We know that the Fed primarily monitors PCE inflation, which is the measure it uses every quarter when it releases its new projections. And on this side, there were no unpleasant surprises in the figures published in February: underlying (“core”) PCE inflation continued to slow down to 2.8%, the weakest increase since March 2021. However, we noted that the monthly variation in this PCE inflation was twice as large as the previous month (+0.4% vs +0.2% the month before).
The following price index publications were a little less favorable: core CPI inflation, another measure of inflation in the United States, is still growing at an annual rate of 3.8%. It is certainly a little better than the previous month (3.9%) but it is however higher than the consensus (3.7%) and the observation is the same for the monthly figure which came out at 0.4% versus a consensus of 0.3% .
Finally, there is the producer price index. Not that its absolute level of progression (+1.6% in annual data) is worrying…but it is very much higher than the consensus which was 1.1% and it is almost double the previous month (0.9%). And in monthly variation (+0.6%), it is twice higher than the consensus and the previous month.
Why focus on this? Because producer prices that rise more strongly than expected can have repercussions on the next PCE inflation figure, the reference for the Fed’s decisions on its rate policy.
The bond markets, once again, were not mistaken and the American 10-year rate rebounded to 4.30% Thursday afternoon after the producer price indices, an increase of 12 basis points in a few hours and knowing that 5 days before, this rate was close to 4%. We also noted an increase in volatility on the SP500, a sign that investors are wondering about the date of the Fed’s first rate cut.
There is one element that seems important to us: for several weeks, American macro publications have fallen more regularly below the consensus than above it, as evidenced by the downward shift in the economic surprise index across the Atlantic. . Latest example: retail sales published Thursday afternoon, certainly showing progress, but weaker than expected.
This is reflected in the Atlanta Fed’s US growth expectations for the first quarter: while this forecast rose to more than 4% in January, it is now at 2.3%. This is certainly a fairly volatile forecast model, but we are not surprised by its trajectory compared to the more erratic macro releases of recent weeks.
And it is perhaps this situation which could push the stock markets to consolidate a little: a first rate cut from the Fed which could only take place in the third quarter, if we are to believe the declarations of certain members of the Fed like Raphael Bostic, and which would be spaced a few months apart from the next one…but with at the same time an economic dynamic which would begin to slow down (notably consumption).
Too gradual a slowdown in price pressure for the Fed to trigger a dynamic series of rate cuts, requiring a somewhat sharper economic slowdown for underlying inflation to converge sustainably with the inflation target.
And that wouldn’t necessarily be a bad thing: indices like the Nasdaq100 have seen an increase of more than 30% in less than 5 months, for the SP500 this increase is 26%. An American stock market still largely driven by tech and the theme of artificial intelligence, but which has completely obscured the sharp deterioration in rate cut expectations: at the end of December these expectations were for 6 rate cuts in 2024, they are not “more than” 3 drops now.
These downgrading expectations of rate cuts are not a problem for investors as long as inflation continues to slow and the economy is resilient…but if the economy begins to weaken and the slowdown in inflation does not is not fast enough, this could create a temporary jaws effect for the stock markets.
For its part, the ECB is a little more precise than the Fed on the timing of the first rate cut and the month of June seems to be slowly taking shape. But not enough to have a totally “dovish” reading of the situation: the pressure on wages has decreased slightly in recent months but they are still increasing at more than 4% and underlying inflation in the euro zone is still moving at 3.1%. This is obviously much better than the peak of 5.7% in 2023 but there is still a “last mile” to go to reach 2% and it will not necessarily be done in a straight line.