U.S. Inflation Cools to 0.3%, Fed Cut Odds Rise to 70%

April's CPI rise fuels 70% trader bets on Fed rate cuts by September, despite analyst skepticism and stagnant retail sales.

By Athena Xu

5/16, 05:15 EDT
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Key Takeaway

  • Traders now see a 70% chance of a Fed rate cut in September after April's CPI rose just 0.3%, below the expected 0.4%.
  • Despite softer inflation, analysts caution against premature expectations for rate cuts, citing the need for sustained lower core figures.
  • Mixed signals from flat retail sales and resilient core inflation components suggest a complex path ahead for monetary policy adjustments.

Inflation Eases, Rate Cut Speculations Rise

April's inflation data revealed a softer increase than anticipated, with the consumer price index (CPI) rising by 0.3% from March, slightly below the Dow Jones estimate of 0.4%. This development has led to a surge in stock market records and sparked discussions about the Federal Reserve's potential rate cuts. Traders, buoyed by the inflation report, are now pricing in a 70% chance of a rate cut by the Fed as early as September, a significant uptick in expectations compared to earlier predictions.

Jerome Schneider of PIMCO highlighted the market's reaction to the lower inflation rate but cautioned about the longer-term trajectory of the Federal Reserve's response. He emphasized the resilience of core inflation figures, suggesting that achieving the Fed's target rate might be challenging without seeing inflation prints of 0.2% or lower in the coming months.

Retail Sales Stagnate Amid Inflation Concerns

The Commerce Department's report on retail sales, which showed no change for the month against an expected 0.4% increase, painted a picture of a consumer base feeling the pinch of higher prices. Jacob Mitchell from Antipodes Partners interpreted the combination of soft inflation and disappointing retail sales data as indicative of a consumer sector beginning to feel the impact of elevated rates. This scenario, according to Mitchell, could ease the Federal Reserve's task in managing economic conditions.

Fed's Dilemma: Balancing Act Continues

Despite the softer inflation and retail sales data, the Federal Reserve faces a complex decision-making environment. The Fed has maintained interest rates at their highest level in 23 years, with the benchmark overnight lending rate targeted between 5.25%-5.5%. Recent comments from Fed Chair Jerome Powell and other officials suggest a cautious approach, emphasizing the need for more evidence of inflation moving sustainably towards the 2% goal before considering rate cuts.

Dan North of Allianz Trade North America and other analysts believe that the Fed is likely to delay any rate cuts until at least September, seeking further data to confirm a downward trend in inflation. This cautious stance reflects the central bank's priority to ensure inflation pressures are adequately contained before adjusting policy.

Street Views

  • Jerome Schneider, PIMCO (Neutral on U.S. interest rates):

    "I think more contextually, we have to really understand that we have celebrated a lower inflation rate, the market has. But, in context, at PIMCO we’re specifically thinking about the longer-term trajectory of how the Fed is going to react to this data... More importantly when you look [at] … what is going on within the segments of CPI and the [Personal Consumption Expenditures Price Index], the more prevalent inflation indicator for the Federal Reserve, it still remains relatively resilient."

  • Jacob Mitchell, Antipodes Partners (Cautiously Optimistic on U.S. economic outlook):

    "If you put the inflation data with the retail sales data earlier in the week, where it was a decent miss, and really weakened discretionary areas, and that to me tells us a story about a consumer that under the hood is starting to feel the effects of these higher rates... I think probably the market is starting to see softer data coming, which will make the job of the Fed a little bit easier."