CPI Ticks in Higher Than Expectations

The inflation issue remains persistent. This is the message we’ve gotten this morning from March Consumer Price Index (CPI) report, which has riled pre-market trading to a notable extent. That’s putting it rather mildly. Ahead of this print, we were +115 points on the Dow, +13 points on the S&P 500 and +49 points on the Nasdaq. Fifteen minutes after the release, we’re now -490 points on the Dow, -77 on the S&P and -225 points on the Nasdaq. Swift and sharp. The 2-year and 10-year bond yields leapt from 4.72% and 4.34% prior to the report to 4.93% and 4.50% now.

Everything came in slightly higher than expectations. Month over month on headline, we saw +0.4% — even with the prior month but +10 basis points (bps) higher than anticipated. This remains the highest we’ve seen since +0.5% in August of last year, but well above the +0.1% from October. Stripping out food and energy costs, +0.4% was also the March figure — also in-line month over month and +10 bps higher than expected.

Year over year CPI is also known as the Inflation Rate. Here we see a +30 bps jump month over month to +0.5% — technically 10 bps higher than analysts were looking for, but in-line with where estimates were just a day or so ago. Gasoline prices have definitely gotten higher in the past month, which is reflected in this data. Core CPI year over year, meanwhile, is steady at +3.8% from the previous month, but yet another 10 bps hike from expectations.

So, what gives? These numbers are far from catastrophic. But they do signal quite strongly that the hotly anticipated June rate cut from the Fed may be mothballed for now, which then puts the three cuts for 2024, in their current dot-plot just rendered last month, in jeopardy. According to CNBC’s Steve Liesman, there is now only at 28% chance for a June rate cut, and July is currently sub-50%. This is forcing market participants to consider we may only see two rate cuts this year, which is leading the sell-off.

We did see some important metrics come down. Car sales, both new and used, are lower than they were a month ago, and so are airfares and owner’s-equivalent rent. The above-mentioned energy prices were a big part of the higher levels, but so were things like auto insurance. In this case, we may choose to look at these higher rates as rather benign; insurance rates may go up across the board, but they never do so month over month. Consider this a one-off.

I will argue that market participants had gotten a little spoiled. Never do we see consistent levels of lower inflation over years’ worth of data — every so often, reports hit a snag or a wrinkle. But it's been some time since we've last had a stall like we're seeing today. While it’s true that higher wages in an uncommonly strong labor market are making inflation stickier on the employment side, the fact remains that we are at half of where we were in 2021 (+7.0% vs. +3.5%), and the higher rates the Fed has set will eventually be felt even at current inflation levels.

What a shame there’s no Ozempic for the stock market. Everyone knows it’s that last 20 pounds that is most difficult to lose, and in a way, that’s where we are economically right now. It’s taking longer to get to our optimal +2% inflation rate, but perhaps we should count our blessings: we’re not crashing through the floor to a full-blown recession. There’s still a good chance the Fed can achieve the “soft landing” we’ve long expected, but it appears we’ll be staying in the air a bit longer.

Meanwhile, Q1 earnings season unofficially kicks off this morning. Earnings from Delta Air Lines DAL beat expectations on both top and bottom lines this morning: earnings of 45 cents per share outpaced the Zacks consensus by 9 cents, while surpassing the year-ago earnings numbers by a full 20 cents per share. Revenues of $13.75 billion in the quarter topped estimates by 7.1%. Shares are bucking the trend of a mass sell-off, up +2.2% on the news this morning.

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