April’s consumer price index report expected to show inflation has already peaked

A group of shoppers in a San Francisco, California grocery store on Monday, May 2, 2020. 
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April’s consumer price index report is expected to show inflation has already reached a peak — a development that some investors say could temporarily soothe markets.

However, economists warn that core inflation may rise even if headline inflation is reduced. They could also expect it to stay high for several months. The core inflation does not include food or energy prices.

According to Dow Jones, the CPI report will show that headline inflation increased by 0.2% or 8.1% in April. This compares to a staggering 9% increase in headline inflation. 1.2% increase in March, or an 8.5% gain year-over-year. Data for April are expected to be available at 8:30 AM. ET Wednesday.

The Core CPI will rise by 0.4% to 6% annually. This compares to 0.3% in March or 6.5% annually.

Stocks were jittery Tuesday before the highly-anticipated data. It is expected that the data will be released on Tuesday. S&P 500The day ended with an increase of 0.25% and NasdaqThe increase was 0.98% It was 0.98%. Dow Jones Industrial Average lost 84.96 points.

Following a dramatic rise to 3.20% on Monday, Tuesday’s benchmark 10-year Treasury yield fell to around 2.99%. Bond yields — which move opposite price — have been running higher at a rapid pace on expectations of aggressive Federal Reserve interest rate hikes.

“I would not say that tomorrow’s CPI matter by itself. BMO fixed income strategist Ben Jeffery said that he believes the combined data of March, Tomorrow’s and May will be the inflection point.

Jeffery however stated that there is a high chance the report will be market moving, regardless.

He stated that he believed it would either increase the selling pressure seen that was 10s-to-3.20%…Or it will incite more dip buying interest from investors who’ve been waiting for indicators that inflation is peaking.

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Stocks could be at a turning point

Some investors believe the data will signal a pivot point in the stock exchange if there is a decrease or an increase in April’s inflation.

Tony Roth (chief investment officer of Wilmington Trust Investment Advisors) stated, “I believe that the market, technical viewpoint, is very focused trying to figure out how much Fed is going to go.”

Unfavorable news would include a hotter report, which could indicate that the Fed is going to take a tougher position on interest rates. Fed Chair Jerome Powell indicated this last week the central bank could hike ratesAt the following meetings, 50 basis points will be added, which is a quarter-percent.

Inflation has caused market anxiety and Fed response could lead to a recession.

“I don’t think this is the end of the drawdown in the market … The market needs to go down 20% at a minimum. Roth stated that 20% is possible if we have better inflation data. The S&P 500 is off nearly 17% from its high.

Roth stated, “If we don’t think inflation will be as high as it is, not only this month, but for consecutive months, I believe the market prices are in recession and it would drop 25% to 40%.”

Two risks emerge

Roth indicated that two exogenous threats to inflation data could be problematic for markets. There are two potential exogenous risks in inflation data. One is unknowns about the price shocks, oil supply pressures and price spikes caused by Russia’s invasion of Ukraine. The other is China’s Covid-related shutdowns.

“Nobody knows how they’re going to play out … Either one of these could be a bigger problem than the market is anticipating right now,” Roth said.

Aneta Markowska, chief financial economist at Jefferies, said she is expecting a hotter-than-consensus report, with 0.3% gain in headline CPI and a 0.5% jump in core. Her view is that the market has lost sight of what inflation could mean and she believes investors need to be more concerned about how it will decline.

She said that consumers are more focused on the slowing year-over year rate. “It looks like real wage increases in April will be positive, on a month over month basis.” But if the Fed can’t get core rates back up to 0.5%, it will be a problem. You’d be running at 6.6% if you average that. This would mean that there is no slowdown.

Markowska stated that central banks assume inflation will slow down to 4% in this year and 2.5% next. She stated that the Fed should ask themselves if they are on track to meet their forecast. If so, it could lead to a greater policy overshoot.

Markowska said that although there is a perception that inflation issues are caused by supply chain problems, these issues are not true.

“I think the ship has left. We have no more supply chains. This is the service sector. “This is the labor marketplace,” she stated. It doesn’t matter if core goods inflation drops and we reach a peak, it won’t solve the problem. It’s everywhere. This is in the services sector. It affects the services sector.

Pooja Shriram, a Barclays U.S. economist stated that she doesn’t believe investors should be too excited about inflation peaking. It is only how rapidly it comes down that will count.

According to her, “For the Fed’s pacification that inflation is falling,” they need to have a very weak core CPI printing. It will be difficult to bring down the Headline CPI because of how swinging is the energy component.

In March, the energy index grew 11%. However, it was less important in April due to lower gasoline prices. According to economists, May’s data will show that energy will become a greater issue as gasoline prices rise again.

Although economists believe used-car prices may fall in April according to some, Markowska says data that she collects indicates an increase at retail.

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