-
Core CPI tops forecasts again, proving stickier than thought
-
Odds for first rate cut shifts from June to September
-
Markets reduce Fed cuts expectations from three to two
Inflation Concerns
The latest U.S. Consumer Price Index (CPI) data came hotter than expected,
leading concerns about its stickiness. The U.S. Labor Department reported
that the annual CPI rose to a 3.5% in March from 3.2% in February, while
the core measure, which excludes the volatile food and energy prices
increased to 3.8%, unchanged from the prior month.
The monthly CPI rose 0.4% in March, vs. expectations of 0.3% increase. The
core figure rose 0.4% month-on-month in March, against expectations of a
0.3% rise.
The hotter than expected data on both underlying and core figures is
indicative that inflation is sticky, which raises concerns that the Fed
could either cut fewer times or not at all in 2024.
Fed Minutes
The Fed minutes on Wednesday showed that officials are worrying that
inflation progress might have stalled with some members flagging the
possibility that the current policy rate was not restrictive enough, and a
longer period of tight monetary policy may need to be maintained to combat
the pace of price rises.
Overall, the minutes showed growing Fed concern about inflation that seemed
to be in the right path at the start of the year. Members pointed to the
strong economic momentum and the disappointing inflation readings over the
past few months, reiterating they need more confidence that inflation will
continue to moderate before cutting rates.
Fed Policy
The Federal Reserve has been on a path of raising interest rates to combat
inflation, but recent data suggests that inflation might not be easing as
anticipated. There’s uncertainty about the timing and extent of future rate
cuts by the Fed. After the release of the CPI data, the odds for an initial
rate cut have shifted to September from June.
According to the CME FedWatch financial markets have now priced in a 16%
likelihood of a 25 basis point Fed rate cut in June, down from 56% prior to
the CPI release. The total easing expected for 2024 fell to around 40 basis
points, which is way lower than the Fed’s own projection of 75 basis
points. The chance of Fed not cutting at all this year increased to 13%,
from 2% a day earlier. [1]
Market Reaction
Stock markets reacted negatively to the hotter-than-expected inflation
data, with all major U.S. indexes retreating. Interest rate-sensitive
stocks, real estate, and housing sectors were particularly hard hit.
Benchmark Treasury yields rose, indicating market concerns about inflation
and future Fed actions.
Earnings Season
Investors are also focusing on upcoming corporate earnings reports to gauge
the health of companies amid the economic uncertainty. Analysts expect
moderate earnings growth in the first quarter, but market sentiment could
be influenced by the actual results and forward guidance provided by
companies.
Analysts expect aggregate S&P 500 earnings in the first quarter to grow
5.0% from last year, lower than the 7.2% annual
earnings growth for the quarter forecasted at the beginning of the year.
Source: TradingView
Technical Analysis
The Nasdaq 100 index has risen 53% in 2023 and is up almost 9% YTD. The
price action remains comfortably above its long-term up trend line and the
Relative Strength Index (RSI) is firmly in the bull market range. While the
large bearish divergence between the price and the RSI indicator warns that
internal momentum conditions are deteriorating, we are of the view that
subsequent correction are likely to be short-lived and contained above the
uptrend line currently crossing at 16,500.
Over the long-term, our view on the tech index remains positive and we
favour higher levels by year end. The first potential long-term upside
target is 19,500; however, levels to 20,700, which is the 1.618% Fibonacci
extension are achievable over time.
Professional investors looking for magnified exposure to the U.S. tech
index may consider Leverage Shares
+3x Long US Tech 100
or
-3x Short US Tech 100
ETPs.
Footnotes:
- CME Group / CME FedWatch Tool