It usually doesn't take long for Wall Street's "hot takes" to come flooding in after the CPI report, and today was no exception. Below we have collected some of the fastest reactions to the headline CPI miss, although as always, these mini narratives are entirely contingent on what prices end up doing, so if markets reverse their early gains, don't be surprised if the authors pull a 180 degree flipflop.
Knowledge Vital, Adam Crisafuli:
"The huge 100bp dip in the Y/Y pace of inflation is a big, positive development, and probably means the Fed is done hiking. However, the Y/Y pace of core inflation rose M/M for the first time since Sept 2022, and this is what the Fed cares most about (which means Powell and his colleagues will be stubborn in pushing back against any talk of rate cuts). While this CPI is bullish for stocks, we think the Q1 earnings season will matter much more for the S&P."
BMO Capital Markets, Ian Lyngen:
“Moderating inflation data in March brings into question whether Powell will ultimately need to keep rates at terminal throughout 2023 — however, it is far too soon in the data cycle to have any true insight on this topic based on CPI alone.”
Wells Fargo, Jay Bryson:
“Potentially, if we’re in a recession at the end of the year, I could see that, but if we have a soft landing in the economy, I can see the inflation rate getting stuck at 3% to 3 1/2%. What is does the fed do at that point? Does it throw in the towel? Do they say we can live with 3-3.5%? Or do they really mean it, we need to get back down to 2%? And if they need to get down to 2%, you’re not going to see rate cuts at the end of this year. I think you’re going to see rates remain, at a minimum, elevated at that point.”
Charles Schwab UK, Richard Flynn:
"The fall in the rate of inflation is being welcomed by investors, who may speculate that the Fed could soon pause its cycle of monetary tightening. That being said, whilst the rate of inflation has fallen, it remains far above the Fed’s 2% target. Officials have been laser-focused on fighting inflation and may decide that additional tightening is required to achieve its target when the FOMC meets later this month.”
CIBC Capital Markets, Karyne Charbonneau:
"The pace of core inflation maintains the case for a follow-up rate hike by the Fed in May, provided banking system issues look sufficiently stable."
Renaissance Macro, Neil Dutta:
“If I think about the economic outlook as four potential scenarios: (1) soft-landing, (2) recession, (3) continued overheating, (4) stagflation – the odds of stagflation went down while the odds of soft-landing went up. Good news for stocks.”
ING, James Knightley:
“The combination of higher borrowing costs and the tightening of lending conditions that will inevitably result from the fallout of the recent banking stresses heightens the risk of a hard economic landing. This will make it even more likely that inflation returns to the 2% target by early next year.”
Miller Tabak, Matt Maley:
“It will be interesting to see how bullish this is seen for the stock market, especially if the earnings season ends up being a very rough one. Of course, a lot of people are worried about earnings and (more importantly) earnings guidance, so maybe it won’t be as bad as we’re thinking right now. If that is the case, maybe the stock market will just keep on rallying as we move through Q2. However, history tells us that when we’re heading into a recession, bond yields and stock prices fall in tandem, so investors might want to be a little bit careful about what they wish for.”
Allianz Investment Management, Charlie Ripley:
“Most of the softness in the report was driven by declining used car prices and a slower acceleration in shelter. Working against the numbers was the increase in airfares of 4%, which is not that surprising given all the spring traveling. On balance, the latest CPI data does not provide much runway for the Fed to continue lifting policy rates after the May meeting, and it is becoming more likely that we are nearing the peak in Fed policy rates.”
Lazard, Ronald Temple:
“Moderating price pressures combined with signs of cooling in the labor market will offer a temporary reprieve to markets. While this is good news, it does not mean tightening is over. Core inflation remains far above the Fed’s target, and the path to 2% will be bumpy. With core CPI likely to end the year above 3%, the Fed has more work to do before it can declare victory over inflation.”
Bloomberg Intel, Ira Jersey:
"The knee-jerk rally in the front end of the yield curve may have gone a bit further than justified, but is directionally correct given the CPI data likely keep the market outlook for the Fed “one and done” as the most likely outcome.... These data solidify our core view of bull steepening of the Treasury curve. Lower-volatility core CPI sectors continue to see price increases, suggesting the current level of inflation may be maintained. However, this trend supports our view the Fed may hike 25 bps more, then remain on hold for the rest of the year.”
Bloomberg Economics, Jonathan Church:
“Headline CPI inflation that came in slightly below expectations in March will provide a bit of relief for the Fed. But still-elevated core prices show inflation remains sticky, and recent OPEC+ production cuts suggest the good news on headline inflation is likely to be short-lived. A strong disinflationary push is expected from shelter over the summer, but given ongoing strength in the labor market and OPEC+’s cuts — as well as pressure from labor-intensive services industries — we still expect the Fed to hike rates by 25 basis points when it meets next month.”
Bloomberg Markets Live, Cameron Crise:
"US headline inflation came in moderately under expectations, though the more important core figure looked largely in line with economists’ forecasts. The monthly 0.1% rise in headline and 0.4% were both “low” — eg, they rounded up to those thresholds — so it probably makes sense that markets are deriving a bit of comfort from the figures. Services inflation excluding rent of shelter was unchanged on the month, and the core version of that index was up 0.25%, which offers up some comfort that the trend in underlying inflation is tilting in a more comfortable direction. As such, it might be reasonable to conclude that the Fed will adopt a wait and see approach in its next meeting, which would effectively end the tightening cycle. That conclusion is still pending today’s minutes, however, so it may well be the case that the initial thrust lower in yields loses momentum soon."
Source: Bloomberg