Global stocks were largely unchanged in early trading this week following the release of the Consumer Price Index (CPI) report for April. Ahead of Wednesday’s inflation report, stocks traded lower as investors feared a potential upside surprise on inflation. As of Tuesday, the Federal Reserve Bank of Cleveland’s Inflation Nowcast had headline and core inflation pegged at 5.2% and 5.56%, respectively. However, stocks subsequently rebounded on Wednesday after the CPI report showed headline inflation rose 4.9% year-over-year, in line with market expectations. Core prices, which exclude food and energy, showed a year-over-year increase of 5.5%, in line with consensus estimates.
The focus of the report was certainly the core CPI, which excludes the more volatile food and energy categories. Core CPI has essentially stalled since the beginning of the year, and we believe the core number must decline significantly before the Fed will consider a pivot from restrictive policy. Looking at the Fed’s summary of economic projections from March, the median participant indicated today’s current Fed funds target range of 5%-5.25% likely would be sufficiently restrictive. Given the collateral impacts of higher rates on areas such as regional banks and commercial real estate, we believe the Federal Reserve will restrain from further rate hikes for the time being.
Looking forward, the focus for the markets will now turn to the debt ceiling and budget talks, where an initial meeting on Tuesday between Congressional leaders produced little progress. While we do not anticipate a default by the U.S. government, we can expect to see elevated volatility in both stocks and bonds until the situation is resolved. For reference, the debt limit has been suspended or raised more than 100 times since the federal government instituted a debt ceiling in 1917.
Source: GSAM, CNBC, JPMorgan
This communication is for informational purposes only. It is not intended as investment advice or an offer or solicitation for the purchase or sale of any financial instrument.
Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results.