Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Global financial markets are cautiously poised at the start of the week as they brace for US CPI inflation data out on Wednesday. After hotter-than-expected inflation so far this year, investors are desperate to see a reversal of trend in April or lose all hope of a Fed rate cut in 2024. ABSI this week will outline what you can expect from the result.

If you recall, back in December 2023, Fed Chair Powell famously pivoted to a rate-cutting bias being uncharacteristically candid in letting markets know that rate hikes are off the table and the board’s focus on deciding when to start easing monetary policy. The result put markets under a rocket with expectations for cuts to begin in March with as many as seven 25 bps cuts across 2024.

Source:  Morningstar

March has come and gone and rates remain at 5.5% due to macroeconomic data, particularly inflation, not going the Fed’s way. Rate cut expectations have continued to falter with markets now pricing in two cuts starting in September. Interestingly financial markets remain resilient and near record highs as hopes linger that hotter-than-expected inflation was just a blip on the radar and that April CPI, due out this week, will drop more than anticipated. 

Last month, inflation printed at 3.5% exceeding expectations of 3.4% and a big reacceleration from February's 3.2% print. Consensus estimates for April are at 0.4% for the month which will keep inflation at 3.5%. If this is the case and expectations are met, I expect markets to react mildly positively to the news that inflation isn’t spirally out of control. 

What investors really need to watch for are minor deviations from the consensus.

Sentiment points to this week’s data point as being a key catalyst for stock markets to break in either direction. A miss on inflation will kill all hope of any rate cuts in 2024 and further fuel the argument for another Powell Pivot from a loosening bias to a tightening one. In contrast, weaker CPI should see US markets test record highs as investors gain confidence in rate cuts later this year.

Which way a break might go nobody knows with absolute certainty. On the inflationary side, you have services inflation being a key driver of inflation as workers demand higher wages in response to sticky inflation. On the other side, housing, which makes up 40% of core CPI and a key driver of the reacceleration recently, is showing signs of slowing materially and there are growing expectations for effective rents to be lower in 2H24.

Source:  Congressional Budget Office

Probability suggests that inflation will come in line with consensus and the markets won’t mind that. However, I don’t think inflation is likely to abate below 3% anytime soon and we won’t see a US interest rate cut in 2024. The Fed is fighting inflation with both hands tied behind its back as the government continues an ultra-loose fiscal policy that has the budget deficit at 6.3% in 2023 and estimated at 5.3% in 2024. Getting inflation back to target is a team effort and right now the two members are running in opposite directions.

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