US inflation data news, still a risk for markets in 2024?

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Markets were factoring in multiple rate cuts going ahead as Inflation came down sharply in past few months. In bull case scenario markets were factoring at least 4 to 5 rate cuts in this financial year, but the recent inflation data is forcing markets to reconsider its view. So, Is the market over optimistic about inflation falling below 2% and rate cuts as soon as in June policy meeting? Lets examine different scenarios.

US recent Inflation data details

The US inflation data which is measured in the consumer price index (CPI) at 3.1% shown a dip MoM as it was 3.4% in December, the US Bureau of Labor Statistics (BLS) reported on Tuesday. Still data was above market expectations, as estimates were that CPI will be at 2.9%. The Core CPI, which excludes volatile food and energy prices, rose 3.9% in the same period, matching the December’s increase and surpassing analysts’ estimate of 3.7%.

Consumers buying power is increasing in US and that’s the primary basis behind FED’s soft landing confidence. Fed in its last meet suggested that war with inflation is still on and they are not thinking about a rate cut yet but also were equally confident of strength in US economy and soft landing.

All items3.1%
Food2.6%
Food at home1.2%
Sugar+ Sugar substitutes7.2%
Other fats + oils5.1%
Carbonated drinks4.8%
Food away from home5.1%
Electricity3.8%
All items less food + energy3.9%
Motor vehicle insurance20.6%
Repair of household items18.2%
Nonprescription drugs9.2%
Outpatient hospital services8.3%
Motor vehicle repair7.9%
Garbage + trash collection6.4%
Rent of primary residence6.1%
Cable television service5.7%
Laundry + dry cleaning services5.4%
Haircuts + other personal care services4.2%
US Bureau of Labor Statistics (BLS)
US-CPI-data
US-CPI-data

Is Inflation still a worry that can shake markets?

To answer this we need to take a deep dive into more data. Apart from inflation data Consumer confidence data are giving mix signals too, Consumer sentiment jumped 13% in recent Jan data to its highest level since July 2021. Wages are growing too though the pace is less but still it is on rise as the hourly pay has exceeded the rate of inflation since May. So one side it is sending a strong signal for economy and consumer sentiment but on other it can keep inflation high for longer period of time.

fed-rate-inflation-data

This is precisely the reason why Fed is keeping a close watch on data and they are in wait and watch mode. In last meet fed chair Jerome Powell denied to comment on early rate cuts by saying that they are not thinking about it and still keeping the war with inflation in fore front. So in this recent inflation data there are still few readings(e.g. Vehicle insurance, repair items, motor repair etc) which are still way above historic average. In other specific categories-

  • Shelter: This remains the major driver of inflation, showing a 6.2% YoY increase in December 2023. Rising rent and housing costs are significant contributors. Mortgage rates are still high though below 2023 peak but average 30-year fixed rates stay around 7%, making homeownership less affordable for many, especially first-time buyers. Major contributor in Inflation data, US housing market is still tight as inventory remains tight. The number of available homes hasn’t significantly increased, keeping upward pressure on prices.

So how much rate cuts now post today’s inflation data

Market was factoring in at least 6 rate cuts in 2024 before today’s inflation data but now given the pace of inflation market is realizing that it ran too away in its forecast so the adjustment caused today’s panic fall. US markets fell as much as 4% in today’s trading session and Treasury yield and US dollar index climbed up sharply.

Now, according to CME Fed watch tool, market interest rate traders are predicting 4 rate cuts of quarter points total 1% in 2024. It means markets see interest rates in 4.25-4.5% range post December 18,2024 meet. Market was expecting first rate cut to come as early as May meet but now it sees rate cuts starting in June policy meet.

Screenshot 133

What next for the markets?

The key question is, what next for markets? As experts warn at life time high a lot of good news is already in the prize and AI, tech and pharma led rally needs more good news to keep going further. Today’s market fall is broad based as all sectoral indices are in red and volatility index VIX is up above 16 after months and is up above 200dma. Post today’s inflation data market correction was something many were sure of but will the market get into a prolonged corrective phase is highly unlikely.

Chances of time wise correction is much higher than price wise corrections. FED is not committing it to take any particular actions and decadal high rates and further hawkish tone will not let inflation make a sharp comeback from here. Though today’s oil price rally is a surprise but mostly energy and other essential item price will remain in check going ahead.

I predict a balance between optimism and pessimism, as chances of higher rate thus weaker economy will not let inflation make a comeback and chance of softer landing and rate cuts will keep the market afloat. Here a look at S&P 500 chart to predict the future movement of the index. With 1st major support in 4850-4900 range and very strong support near 4500 range, chances of a major fall is limited.

SPX_2024-02-14_02-24-27

Read our more article on Inflation data and US rate hikes here.

Gaureesh Vats Shukla
Gaureesh Vats Shuklahttps://finminutes.com
Graduate in Aerospace engineering from SRM University, Gaureesh started studying Indian Financial market and macros since his last year of undergrad in 2018-19. Later he scored good percentile in CAT and took admission in one of India's most reputed B-school but dropped out soon to pursue PGP in SM (RA AND PMS) From reputed NISM (a SEBI institute). He focuses on Indian and US markets primarily and likes to conduct research on top down approach. Apart from fundamental analysis he also frequently research stocks using various technical indicators. He likes reading books and playing PC games and cooking delicious veg dishes in free time.

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