Inflation Eases to 3.4%, Rate Cut Hopes Rise Amid Mixed Retail Sales

Inflation dips to 3.4%, retail sales stagnate, sparking debate on potential Fed rate cuts by year-end.

By Athena Xu

5/15, 12:44 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF

Key Takeaway

  • April's CPI and retail sales data suggest easing inflation and consumer spending, potentially easing Fed pressure with a rate cut possible by year-end.
  • Market reactions mixed, with optimism for a bull market despite retail sales miss; economists see "benign moderation" rather than sharp decline.
  • Experts divided on Fed's next move; some predict rate cuts as early as September, while others foresee further hikes to tackle inflation.

Inflation and Retail Sales Impact Markets

The latest updates on the U.S. economy have provided a mixed bag of results, with the headline inflation rate slightly decreasing from 3.5% to 3.4% year-on-year in April 2023. This deceleration, albeit modest, signals a slowing of price pressures. However, retail sales data presented a more concerning picture, showing a flat month-on-month reading, a significant drop from the previous 0.6% and below the expected 0.4% rise. This combination of slowing inflation and weaker consumer spending has led to a positive reaction in the markets, with traders bolstering their convictions that a rate cut could be on the horizon.

Expert Analysis on Economic Data

Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, highlighted the dual nature of the recent data, noting the positive aspect of inflation not reaccelerating but expressing concern over the potential economic impact of reduced consumer spending. Stephen Juneau, an economist at Bank of America, described the April CPI report as aligning with expectations but cautioned that it's too early to significantly alter monetary policy expectations based on a single report. Aditya Bhave, also from Bank of America, viewed the retail sales data as indicating a "benign moderation" in economic activity rather than a sharp decline. Jeffrey Roach of LPL Financial pointed out the easing of services inflation and the relief provided by falling grocery prices, while Skyler Weinand of Regan Capital and Tuan Nguyen of RSM US LLP discussed the implications of the data on Federal Reserve policy and the broader economic outlook.

Federal Reserve's Policy Dilemma

The recent economic data has sparked a debate on the Federal Reserve's next moves. While some experts, like Weinand, suggest that the softer CPI print could give the Fed room to consider rate cuts as early as September, others, like Nguyen, emphasize the encouraging signs for further disinflation. However, there's a consensus that the Fed's path to achieving its 2% inflation target remains uncertain. Bill Adams of Comerica Bank predicts the Fed will initiate rate cuts starting in September, followed by another in December, in response to the decrease in core inflation and sluggish retail sales.

Street Views

  • Chris Zaccarelli, Independent Advisor Alliance (Optimistic on the market):

    "We believe we are still in a Bull Market."

  • Stephen Juneau, Bank of America (Neutral on inflation and Fed policy):

    "While the inflation data are a step in the right direction, it is one report. We retain our call for the first cut in December"

  • Aditya Bhave, Bank of America (Neutral on economic activity):

    "This report gave us some good signs that services inflation is easing."

  • Jeffrey Roach, LPL Financial (Cautiously Optimistic on economy and market):

    "The soft landing narrative is still a possibility but not a guarantee."

  • Skyler Weinand, Regan Capital (Neutral to Bearish on Federal Reserve's next move):

    "It's more likely for the Fed's next move will be to raise rates than to cut."

  • Tuan Nguyen, RSM US LLP (Optimistic on disinflationary trends):

    "The economic fundamentals remain encouraging for further disinflation..."

  • Bill Adams, Comerica Bank (Bullish on interest rate cuts by Federal Reserve):

    “Growth will likely stay in a lower gear in the rest of 2024... keeping inflation on a slowing trajectory.”