The data of the US CPI for the month of March has exceeded expectations and has given wings to the ‘hawks’ in the markets. The bond has erased almost an entire interest rate cut, rising 18 basis points to 4.55%, and the expected date for the start of Federal Reserve cuts has been pushed back until the end of summer. So, the shake-up in bonds leaves just two interest rate cuts on the table for this year and two more for the following year, reflecting the growing fear that inflation may be getting stuck above 3%.
According to expectations calculated by CME Fedwatch, the probability of a rate cut in June has plummeted today from 56% to 16%, and 57% of traders believe there will also be no rate cut in July. It is now necessary to go as far as September for a rate cut to be the most likely scenario, and even a third of market operators believe that the desired cut may not be seen by then.
In recent weeks, numerous Fed executives have spoken to the media, warning that it was still unclear whether inflation had been defeated and that no rate cut should be taken for granted before having greater certainties. Today’s CPI data, the third to beat expectations, seems to have dealt the final blow to any hope of immediate cuts.
This afternoon, analysts at Goldman Sachs announced a change in their expectations, from three to two rate cuts this year, in July and November. “We believe that the Committee will need to see a longer series of weaker inflation data in the coming months,” they say in the document.
Meanwhile, David Page, chief macroeconomic research at AXA IM, maintains his expectations of three cuts: “The Fed is likely to need more than two softer reports before gaining enough confidence. We expected the Fed to begin relaxing its restrictive stance in June, but now we are pushing back our expectation of the first cut to July.” However, he warns that “the risks to this outlook are of a longer delay and even fewer cuts.”
And for Doug Ramsey, chief investment officer at Leuthold Group, “The key problem for the Federal Reserve is that market gains are occurring with the economy at full employment and growing moderately,” he warned. “The stock market celebration of the imminent rate cuts is actually putting those cuts in danger“.
