Tag: price indices

Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

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Parts of the financial markets are struggling to adapt to the idea that the Federal Reserve might keep raising interest rates even after this week’s data clearly pointed to decelerating inflation.

Late Thursday, Federal Reserve Gov. Christopher Waller indicated he remains unmoved by June’s consumer price index and that he supports two more rate hikes this year even though monthly core inflation was just 0.2%, or half of what was seen in May.

By Friday morning, parts of fixed-income markets “refused to play along,” with rates on overnight index swaps pricing in “just one more hike, not two — suggesting still that the Fed’s hawks have lost some of their credibility,” said Thierry Wizman, Macquarie’s global FX and currencies strategist.

The bottom line from Waller’s speech is that it’s not solely inflation data that’s driving the Fed’s decisions, complicating the assessments made by traders and investors from here. Policy makers want to make sure that the recent deceleration in inflation feeds through broadly across goods and services sectors, and doesn’t revert back to persistently high core readings, according to the Fed governor. What’s more, “the robust strength of the labor market and the solid overall performance of the U.S. economy gives us room to tighten policy further,” he said.

Some important corners of the financial markets did respond to his remarks, namely the Treasury market. Treasury yields were broadly higher on Friday, with the policy-sensitive 2 year yield
TMUBMUSD02Y,
4.733%
jumping off a one-month low, as fed funds futures traders boosted the likelihood of a post-July rate hike by November. Traders now see a 30.1% chance that the fed funds rate target will either get to 5.5%-5.75% or higher in four months — up from a current level of 5%-5.25% and after factoring in a widely expected quarter-of-a-percentage-point hike on July 26.

However, equity investors were largely focused on other things. U.S. stocks
DJIA,
+0.36%

SPX,
-0.15%

COMP,
-0.34%
mostly reacted to Friday’s batch of good earnings reports from major banks, as well as fresh data from the University of Michigan. Meanwhile, the U.S. Dollar Index
DXY,
+0.16%,
which typically reacts to changes in U.S. interest-rate expectations, was up by just 0.1% after dropping earlier in the day.

“Inflation coming down has led to market anticipation that the Fed does not have much more tightening to do,” said David Donabedian, chief investment officer of CIBC Private Wealth US, which has $94 billion in assets under management and administration. “And the big banks are looking solid with recent earnings reports. While this might be a short-term swing in sentiment, the market is not fighting the optimism and seems to be pricing in economic nirvana,”

“While we are pleased to see progress on the inflation front, we continue to have concerns about a weakening economy and lower demand that would result to a challenge for corporate earnings,” Donabedian wrote in an email. “There are some economic indicators that look good — like jobs — but these are telling us how the economy is doing yesterday and today. They don’t predict the future.”

As of Friday afternoon, stocks were headed for their fifth day of gains, helped partly by the optimism unleashed from Wednesday’s consumer price report and Thursday’s producer price data. All three major U.S. stock indexes opened higher — brushing aside Waller’s comments — and pared gains only after data from the University of Michigan showed 5-10 year inflation expectations rising this month.

Waller’s speech, delivered to the Money Marketeers of New York University, clearly articulates areas that investors may be missing in their assessments of where the Fed could go with rates, analysts said. In his mind, the impacts of policy tightening from last year “are feeding through to market interest rates faster than typically thought.” In addition, Waller said, households and firms appear to be adapting more rapidly to the dramatic, fast pace of interest-rate changes seen since March 2022.

“If one believes the bulk of the effects from last year’s tightening have passed through the economy already, then we can’t expect much more slowing of demand and inflation from that tightening,” Waller said in his prepared comments.

“To me, this means that the policy tightening we have conducted this year has been appropriate and also that more policy tightening will be needed to bring inflation back to our 2 percent target,” he said. “Pausing rate hikes now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station.”

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July 14, 2023
U.S. consumer sentiment soars in July to highest level since September 2021

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The numbers: The University of Michigan’s gauge of consumer sentiment rose to a preliminary July reading of 72.6 from a June reading of 64.4. It is the largest gain since December 2005. Sentiment is at its highest level since September 2021.

Economists polled by the Wall Street Journal had expected a June reading of 65.5.

However, Americans’ expectations for overall inflation over the next year rose to 3.4% in July from 3.3% in the prior month. Expectations for inflation over the next 5 years ticked up to 3.1% from 3% in June.

Key details: According to the UMich report, a gauge of consumers’ views on current conditions jumped to 77.5 in July from 69 in the prior month, while a barometer of their expectations rose to 69.4 from 61.5.

Big picture: Sentiment is improving as gasoline prices have held steady this summer. Low unemployment is also playing a role.

What are they saying? “The good news is that sentiment has roughly retraced half of its fall from pre-pandemic levels. For most Americans, a modest gain in income is expected. Still, durable goods buying conditions remain far off their recent levels. The rise in confidence seems restrained, and clouds concern about the forecasted economic downturn which continues to linger,” said Scott Murray, economist at Nationwide, in a note to clients.

Market reaction: Stocks
DJIA,
+0.33%

SPX,
+0.10%
opened higher on Friday while the yield on the 10-year Treasury note
TMUBMUSD10Y,
3.805%
rose to 3.81%.

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July 14, 2023
Fed’s Waller, unimpressed by inflation data, calls for two more rate hikes this year

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Federal Reserve Board Gov. Christopher Waller said Thursday he was not swayed by June’s benign consumer inflation data, and said he wants the central bank to go ahead with two more 25-basis-point rate hikes this year.

“I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said in a speech to bond-market experts, known as The Money Marketeers of New York University.

That would bring the Fed’s benchmark rate to a range of 5.5%-5.75%.

Waller said that, while the cooling of CPI data for June was welcome news, “one data points does not make a trend.”

“The report warmed my heart, but I have got to think with my head,” Waller said.

He noted that inflation slowed in the summer of 2021 before rocketing higher.

In his remarks, Waller said he is now more confident that the contagion from the collapse of Silicon Valley Bank in March will not create a significant problem for the economy.

“I see no reason why the first of those two hikes should not occur at our meeting later this month,” he said.

Traders in derivative markets have priced in high odds of a rate hike after the Fed’s meeting in two weeks. But traders have been skeptical the Fed will follow through with a second hike, even before the soft CPI data.

Waller said the timing of the second hike depends on the data.

“If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” he said.

During a question-and-answer session, Waller stressed that September was a “live meeting,” meaning the Fed could hike rates at that time.

Some economists had thought the Fed was moving to an “every-other-meeting” pace of hikes, but Waller said he did not favor such mechanical moves, and that data should be the deciding factor.

Some Fed officials want the central bank to hold rates steady in July, and perhaps through the end of the year, thinking the economy is going to be hit by “lagged” effects from past rate hikes.

Waller said he believes the bulk of the effects from last year’s tightening have passed through the economy already.

“Pausing rates now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station,” he said.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.786%
has fallen to 3.77% this week after a lower-than-expected gain in jobs in the June report and the cooling of inflation. The yield had hit a recent high of 4.07% ahead of those softer reports.

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July 13, 2023
U.S. stocks rise as bulls get ‘wish’ on inflation report, yet soft landings for Fed are ‘pretty improbable’

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Markets seem to be embracing the notion of a soft landing for the U.S. economy despite inflation remaining above the Federal Reserve’s 2% target.

“Soft landings are not impossible, but they’re pretty improbable,” said Bob Elliott, co-founder, chief executive officer and chief investment officer at Unlimited Funds, in a phone interview. “They’re particularly challenging in an environment where the labor market is tight,” he said, and yet “many investors are sort of enamored with this idea that we could get a soft landing.”

The U.S. stock market was rising Wednesday after fresh data showed inflation rose in June slightly less than expected. Meanwhile, the unemployment rate remains low in the U.S., with wage growth helping to fuel consumer spending in an economy that grew at a revised 2% annualized pace in the first quarter.

“There’s a race going on between the Fed slowing the economy down, and then on the other side, inflation becoming entrenched,” said Elliott. In that race, the Fed has been “one or two steps behind,” he said, ahead of Wednesday’s inflation reading.

The consumer-price index showed U.S. inflation rose 0.2% in June for a year-over-year rate of 3%, according to a report Wednesday from the Bureau of Labor Statistics. Core CPI, which excludes energy and food prices, increased 0.2% last month for a year-over-year rate of 4.8%. The Bureau of Labor Statistics said core inflation’s rise in June marked the smallest monthly increase since August 2021.

“The Fed will see the June CPI report as progress, but they are still very likely to raise the target rate a quarter percent at their decision in July,” Bill Adams, chief economist for Comerica Bank, said in emailed comments Wednesday. “The Fed would rather overtighten and slow the economy more than necessary than under-tighten and risk inflation accelerating when the economy regains momentum.”

Many investors have been expecting the Fed to hike its benchmark interest rate by a quarter percentage point at its policy meeting later this month, which would bring it to a targeted range of 5.25% to 5.5%. Federal-funds futures on Wednesday pointed to a 92.4% probability of such a rate hike and a slightly more than 80% chance of the Fed then pausing at its next meeting in September, according to CME FedWatch Tool, at last check.

After the expected increase in July, traders in the fed-funds-futures market were on Wednesday largely expecting the Fed to hold rates steady for the rest of the year.

“The bulls get their wish – CPI print came in better than expectations,” said Rhys Williams, chief strategist at Spouting Rock Asset Management, in emailed comments Wednesday. “We think the danger now is that the Federal Reserve does one too many rate increases and the soft landing turns into something harder.”

In Elliott’s view, both the stock and bond markets lately appeared to be embracing the idea of a soft landing for the economy.

The yield on the two-year Treasury note, which recently has been trading below the Fed’s benchmark rate, tumbled after the CPI report was released Wednesday. Two-year yields
TMUBMUSD02Y,
4.758%
were down about 16 basis points around midday Wednesday at 4.73%, according to FactSet data.

“As the Fed has moved interest rates to very restrictive levels thus far, and probably will execute another hike or possibly two from here, we think that patience should be a real virtue in their overall disposition toward ongoing monetary policy,” said Rick Rieder, BlackRock’s CIO of global fixed income and head of the firm’s global allocation investment team, in emailed comments Wednesday. “Today’s CPI report for June displayed notable moderation, which is good news for policy makers, markets and households overall.”

U.S. stocks were up Wednesday afternoon, with the S&P 500
SPX,
+0.83%
gaining 0.7% while the Dow Jones Industrial Average
DJIA,
+0.39%
rose 0.4% and the Nasdaq Composite
COMP,
+1.15%
advanced 0.9%, according to FactSet data, at last check. The stock-market’s fear gauge, the Cboe Volatility index
VIX,
-7.28%,
was down more than 7% at 13.8 around midday Wednesday.

Read: S&P 500 is most likely going to correct back to 4,100, Mizuho warns market bulls

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July 12, 2023
U.S. stocks open higher after CPI data shows inflation at lowest in more than two years
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U.S. stocks opened higher Wednesday after data showed the rate of inflation in June slowed to the lowest level since early 2021, fueling hopes that the Fed may be close to being done with its interest rate hikes.

How are stocks trading
- The Dow Jones Industrial Average
  DJIA,
  +0.78%
  gained 281 points, or 0.8% to around 34,546
- The S&P 500
  SPX,
  +1.03%
  added 40 points, or 0.9% to about 4,479
- The Nasdaq Composite
  COMP,
  +1.36%
  rose 158 points, or 1.1% to roughly 13,915
On Tuesday, the Dow Jones Industrial Average rose 317 points, or 0.93%, to 34261, the S&P 500 increased 30 points, or 0.67%, to 4439, and the Nasdaq Composite gained 75 points, or 0.55%, to 13761.
What’s driving markets

Stocks opened higher, while Treasury yields and the dollar were lower after data on Wednesday showed U.S. inflation at its slowest pace in more than two years.

U.S. consumer prices rose a modest 0.2% in June. Economists polled by the Wall Street Journal forecasted an increased of 0.3%. The yearly rate of inflation decelerated to 3% from 4% in the prior month, marking the lowest level since March 2021.

The so-called core rate of inflation that omits food and energy rose a mild 0.2% last month. That’s the smallest increase in almost two years. Wall Street had forecast a 0.3% gain. The annual rate of core inflation decreased to 5% from 5.3% in the prior month.

See: U.S. inflation slows again, CPI shows, as Fed weighs another rate hike

The markets have been receiving the CPI print “pretty well,” said Brian Katz, chief investment officer at the Colony Group.

The lower-than-expected CPI data is likely to “prolong the uptrend [in stocks] that we’ve been experiencing this year,” Katz in a call. “As long as we are in this environment where disinflation continues and we have reasonable growth, it is a good environment for risk assets,” Katz said.

Inflation in June fell in a majority of the important categories, most notably housing prices, which had been elevated, according to George Mateyo, chief investment officer at Key Private Bank.

“The Fed will embrace this report as validation that their policies are having the desired effect – inflation has fallen while growth has not yet stalled. But it most likely won’t change their mind to raise interest rates later this month,” Mateyo wrote in emailed comment Wednesday.

Fed fund futures traders are still pricing in an over 90% chance that the Fed will raise its benchmark interest rate by 25 basis points in its meeting later this month.

Still, some analysts are optimistic that the Fed may cease its interest rate hikes.

The inflation print in June “is enough on a standalone basis for the market to put in question the Fed’s dot projections of two additional hikes left this year and consequently pull interest rate volatility down,” according to Alexandra Wilson-Elizondo, deputy chief investment officer of multi asset solutions at Goldman Sachs Asset Management.

“Yet despite the disinflationary trends, the level of Fed funds rate has only risen to levels comparable to inflation. This contrasts with previous hiking cycles when the Fed hiked rates well above inflation. Therefore, we continue to expect that US monetary policy will stay restrictive for longer, but after this print the Fed very well may be done,” Wilson-Elizondo wrote in emailed comment.

There will also be a batch of commentary from Fed officials for the market to contend with on Wednesday. Minneapolis Fed President Kashkari will speak at 9:45 a.m.; and Atlanta Fed President Bostic will make comments at 1 p.m.. Also, the Fed Beige Book will be released at 2 p.m.. All times Eastern.

Companies in focus

Shares of ShiftPixy Inc.
PIXY,
-15.90%
plunged almost 22% Wednesday, after the workforce management software company’s public equity offering valued the stock at a deep discount.

Lucid Group Inc.
LCID,
-11.02%
shares dropped 5.5% after the company said Wednesday that it delivered 1,404 vehicles during the second quarter, while producing 2,173 vehicles at its Arizona facility.

SunPower Corp.
SPWR,
+7.82%
shares jumped 6.4% Wednesday after Raymond James analyst Pavel Molchanov upgraded the stock to strong buy from outperform.
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July 12, 2023
He called the 2023 stock-market rally. Here’s what Wall Street’s biggest bull sees for the second half.

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Few Wall Street strategists were looking for a robust rally to kick off 2023 after 2022 went into the books as an exceptionally brutal year.

And then there was Tom Lee, an enduring equity bull and the head of research at Fundstrat Global Advisors, who set a 2023 year-end price target of 4,750 for the S&P 500
SPX,
-0.79%
back in December, among the most bullish forecasts for the benchmark.

Now, Lee is even more bullish on the stock market as the second half of the year gets under way. Lee lifted his year-end target for the S&P 500 by 75 points to 4,825 on Monday, which would represent an around 9.4% gain from Thursday’s level. It would also eclipse the all-time high finish of 4796.56 set on Jan. 3, 2022.

“In our view, the stock market bottomed October 12, 2022, and the rise over the past nine months is the start of a new bull market,” said Lee. “We have had a huge decline in inflation, and the inflation war is the war the Fed is waging and seemingly winning.”

The S&P 500 has jumped 14.9% this year, according to Dow Jones Market Data, having exited its longest stretch in bear market territory since 1948. It ended Thursday near 4,411. The tech-heavy Nasdaq Composite
COMP,
-0.82%
has surged more than 30%, while the Dow Jones Industrial Average
DJIA,
-1.07%
lags behind, up 2.3%.

See: History shows stock market’s bullish momentum in the first half could spill over into the second half, but analysts are not so sure

Lee, in a phone interview, told MarketWatch a decline in inflation, especially a downshift in headline consumer-price index toward 3%, could take pressure off the Federal Reserve.

Then the Fed could pivot to a more dovish stance despite deliver a hawkish pause in June, Lee said. Policy makers are often referred to as doves — who favor less restrictive monetary policy — and hawks — who favor tighter policy.

Nowcasts from the Federal Reserve Bank of Cleveland estimate that June CPI inflation may come in at 0.4% for the month, bringing the year-over-year level down to 3.2% from 4% in May. However, core inflation may come in at a 5.1% year-over-year rate on these nowcast estimates, lower than the 5.3% increase in the previous month but well above the central bank’s 2% goal.

“The core inflation is sticky because it still has these residual components such as housing and autos lagging, and once those start to fade, core CPI would fall toward under 3% annualized,” Lee said in a phone interview on Wednesday.

Fed Chair Jerome Powell in June warned that policy makers still expect more interest-rate increases this year to combat inflation, with policy makers forecasting two more quarter-point hikes.

“But two additional hikes to me isn’t as much of a shock as 500 basis points in 12 months,” Lee said, referring to the series of increases that took the fed-funds rate from near zero to its current level of 5% to 5.25% since March 2022.

See: Here’s what Wall Street’s most bullish analyst heading into the year thinks of the stock market now

Meanwhile, continuous advancements in artificial intelligence are another catalyst Lee thinks could drive the “new bull market.”

The recovery of the stock market this year has been led by megacap technology stocks after the craze around AI started to drive bullish sentiment on tech shares in the second quarter. However, many market participants have questioned the rally’s overreliance on the “Magnificent Seven” cohort, pointing out narrow market breadth that has left the average stock behind.

Lee argued that market breadth has improved significantly, and should continue to do so.

“If inflation is cooling, and therefore people become more confident that two rate hikes are the most, or maybe there’s not even two hikes, then I think it’s going to ease financial conditions, so interest rates and bond-market volatility should be diminishing,” Lee said.

The forward price-to-earnings, or P/E, ratio of the S&P 500 excluding energy was 15.7 times at the start of 2023 and now stands at 16.4 times, a mere 0.7 point increase, according to Lee.

“We believe P/E should expand as companies are viewed as resilient and we are at the start of a new earnings-per-share cycle,” the veteran strategist wrote in a Monday note. “But the key is the above happening — a combination of easing inflation and improving growth outlook.”

See: The stock market is headed for a big first-half gain. What history says that means for the rest of 2023.

In late October, Lee remained resistant to cutting his 2022 year-end price target of 5,100 and still expected a “base” case for 2023 that the S&P 500 could gain over 25%. That was counter to consensus, which saw the gauge falling to 3,000 in the first half 2023 before recovering to a flat finish amid a slide by the economy into recession.

“There’s plenty of people who think that things are going to get weaker because monetary policy tightening hasn’t been felt yet. I don’t know when people change their minds — it’s probably when the Fed decides to change its mind,” Lee said. “In my opinion, it’ll be easier for the Fed to say things more dovish if the inflation headline is at 3%. But until that happens, nobody believes inflation is falling.”

Lee defended his 2022 bullish call. The S&P 500 ended last year at 3,839.50, down 19.4%.

“If you accepted our view [in 2022], you wanted to buy stocks, but those people who didn’t believe us went to cash or went defensive. Even though it didn’t play out at the end of last year, it was the right position to have because stocks have recovered everything in 2023. We’ve been sticking with our view and many of our clients think we’ve kept them involved.” Lee told MarketWatch.

See: ‘Rolling recession’ turns to ‘rolling expansion,’ says top Wall Street economist

He admitted it wasn’t easy to be bullish in the first half of this year amid “a battle” between bullish and bearish factors, while stocks suffered a pullback following the collapse of three U.S. regional banks in March.

The average S&P 500 year-end price target is 4,113 as of July 5, according to data compiled by MarketWatch.

As for what could go wrong with his outlook for the second half? “Nothing’s guaranteed,” Lee said, referring to uncertainties around inflation, the risk of a Fed policy mistake, the Ukraine war, China’s disappointing economic recovery, consumer spending and other factors.

“Everyone is focusing on the risk, so I don’t think these are necessarily going to surprise us as much,” Lee said.

“At some point if the market doesn’t fall back, there’s going to be a panic buying because I’m sure the majority of people think this is just a bear-market rally and it’s going to fail. However, at some point they have to acknowledge that that may not happen,” Lee said.

“I think that there’s more risk of a panic-buying moment than panic-selling moment.”

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July 6, 2023
What’s at stake for stock and bond investors in second half of 2023

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There’s a lot riding for stock and bond investors in the second half of the year, with the biggest question centered around whether the idea of “immaculate disinflation” can come fully to fruition.

The term refers to the notion that inflation might meaningfully dissipate from here, without a significant uptick in U.S. unemployment or a major recession. It’s considered to be the perfect scenario for investors and policy makers, who want inflation back down to their 2% target, and one in which the Federal Reserve’s main policy rate target wouldn’t need to go much higher from its current level between 5%-5.25%.

What makes the path ahead so tricky is that core readings that represent the purest reads on inflation are proving to be stubborn and it isn’t clear whether they’ll turn meaningfully lower, fast. If they don’t, that would likely put pressure on central bankers to keep up their inflation fight and has the potential to drive up interest-rate expectations, as well as Treasury yields. Though the bond market has come around to the fact there won’t likely be any rate cuts by the Fed soon, it still isn’t completely on board with the idea of higher rates for longer — which, in turn, is helping to support equities for now.

“The problem for the disinflation people or believers is that the core readings continue to come in too high,” said Jeffrey Cleveland, director and chief economist at Payden & Rygel, a Los Angeles-based investment management firm that oversees $148.9 billion in assets.

Friday’s core reading from the Fed’s favorite inflation gauge — known as the PCE — was 0.3% for the month of May, and has been at or above that mark for six straight months.

Via phone, Cleveland said his firm expects the monthly core PCE reading to end the year above 0.3%, but “you need monthly core PCE readings to be 0.1% or 0.2% to see meaningful disinflation.” If inflation surprises to the upside, “the whole Treasury curve moves up, with the 2-year rate most susceptible,” which would likely dent the performance of stocks.

Cleveland said he expects the policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y to get back to 5% by December — a level that was last seen in March.

The first six months of this year have turned out to be great for U.S. equities, with the Nasdaq-100
NDX,
+1.63%
on track for its best first-half performance on record, as investors came around to the idea that the economy is resilient enough to absorb higher rates. The unemployment rate stood at 3.7% as of May as the U.S. added a shockingly large number of jobs, while annual core readings from the consumer-price index and PCE index came in at 5.3% and 4.6%, respectively, for May.

Read: How stocks and every other major asset have performed in first half of 2023 — and over the last 18 months

Meanwhile, the benchmark 10-year yield
TMUBMUSD10Y,
3.812%,
which reflects investors’ long-term U.S. outlook, has remained relatively contained near 3.75% for months as robust U.S. data rolled in, accompanied by signs of overall inflation easing when waning gas and food prices are factored in.

Data released this week reaffirmed that the U.S. economy and labor market are holding up, despite 5 percentage points of Fed rate hikes since March 2022. With policy makers signaling two more hikes may be on the way starting in July, the risk is that the economy continues to prove resistant to policy makers’ actions and requires even more tightening.

“Not only is the U.S. economy continuing to prove resilient in the face of significantly tighter monetary policy, but it also appears the starting point of the economy for 2023 was even higher than previously anticipated with the consumer proving to be an even stronger force across the first three months,” said Stifel, Nicolaus & Co. economists Lindsey Piegza and Lauren Henderson, in a note this week.

Via phone, Henderson said her Chicago-based firm isn’t buying into the “immaculate disinflation” theory yet and thinks inflation “is proving stickier and more persistent than many expected.”

Stifel, which updates its forecasts on a quarterly basis, is standing by its year-end expectations for the 2- and 10-year Treasury yields
TMUBMUSD10Y,
3.812%
to be at 4.65% and 3.45%, respectively, she said. That’s below the current levels for those rates because Stifel economists foresee a short, shallow recession “sometime in the fourth quarter or beyond,” as policy makers push the fed-funds rate target up to 5.75% by year-end and stay there through 2024, according to Henderson.

Inside the market for fixings, or derivatives-like instruments in which bets can be made on upcoming consumer-price index reports, traders have been coalescing around the view that the annual headline CPI rate is likely to start falling toward 2% this year. They even see the core CPI reading dropping to roughly 2.5% annually and to 0.2% monthly, in relatively quick fashion.

However, one big name has a warning. Former New York Fed President Bill Dudley said inflation could easily go higher than his estimated 2.5% long-term average, and that the 10-year Treasury yield might even go above his “conservative” estimate of 4.5%.

On Friday, financial markets were focused on the positive aspects of the PCE report, with all three major U.S. stock indexes
DJIA,
+0.97%

SPX,
+1.31%

COMP,
+1.49%
higher in afternoon trading. Meanwhile, 3-month
TMUBMUSD03M,
5.320%
through 30-year Treasury yields
TMUBMUSD30Y,
3.854%
all moved lower.

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June 30, 2023
Nasdaq posts best first half since 1983 as inflation data power Friday stock surge
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U.S. stocks finished higher Friday, with the Nasdaq Composite closing out June with its strongest first half of a year since 1983, as investors hoped the Federal Reserve might be able to back off its inflation battle more quickly than Fed chief Jerome Powell has telegraphed.

How stock indexes traded
- The Dow Jones Industrial Average
  DJIA,
  +0.84%
  rose 285.18 points, or 0.8%, to close at 34,407.60
- The S&P 500
  SPX,
  +1.23%
  gained 53.94 points, or 1.2%, to finish at 4,450.38, its highest closing value since April 20, 2022.
- The Nasdaq Composite
  COMP,
  +1.45%
  climbed 196.59 points, or 1.4%, to end at 13,787.92, marking its highest closing value since April 7, 2022.
For the week, the Dow gained 2%, the S&P 500 advanced 2.3% and the Nasdaq increased 2.2%, according to Dow Jones Market Data. All three indexes rose in June, with the S&P 500 climbing for a fourth straight month to book its longest monthly win streak since August 2021. The Nasdaq also climbed for a fourth consecutive month to score its longest such win streak since April 2021.
What’s driven markets

The final trading day of the week, month and quarter presented a positive picture for U.S. stocks as the main indexes advanced following the latest inflation report.

“Clearly today the market likes and is responding to the inflation data,” said Chris Fasciano, portfolio manager at Commonwealth Financial Network, in a phone interview Friday. “It continues to show softening inflation and that’s clearly what the Fed’s looking for,” he said. “I think investors are comfortable right now with a soft-landing scenario” for the economy.

On Friday, data showed U.S. inflation measured by the personal-consumption-expenditures price index eased to 3.8% in May on a 12-month basis, the slowest increase since April 2021.

The PCE price index edged up 0.1% on a month-over-month basis in May, while core prices, which exclude volatile food and energy products, increased by 0.3%. The government’s PCE inflation report was in line with economists’ expectations.

See: U.S. inflation slows, PCE shows, but price pressures still intense

The data added to an increasingly upbeat portrait of a U.S. economy, which has continued to expand despite the Fed’s aggressive tightening of monetary policy. Gross domestic product in the U.S. expanded 2% during the first quarter, much stronger than the previous 1.3% reading, data released on Thursday showed.

In other U.S. economic updates, the University of Michigan said Friday the final reading of its consumer-sentiment index for June improved to 64.4. That’s a four-month high.

Still, the PCE report showed consumer spending rose just 0.1% in May, slower than economists had anticipated.

The Federal Reserve has been raising interest rates since 2022 to cool the economy and tame inflation. Fed Chair Jerome Powell said earlier this week that he didn’t expect inflation in the U.S. to return to the central bank’s 2% target until 2025.

“Right now, the Fed’s job is not clear-cut,” said George Mateyo, the chief investment officer of Key Private Bank, in emailed commentary Friday. “While they may not be done with rake hikes, perhaps they don’t have much more work to do.”

The U.S. stock market has rallied this month, bringing the S&P 500 index’s gains this quarter to 8.3%. The S&P 500 jumped 15.9% in the first six months of this year, while the tech-heavy Nasdaq soared 31.7% for its best first half since 1983, according to Dow Jones Market Data.

Companies in focus

Nike Inc. shares
NKE,
-2.65%
fell around 2.7% after the retailer’s fourth-quarter profit came in below Wall Street expectations amid markdowns and weaker demand for sneakers and clothing

Constellation Brands Inc.
STZ,
-0.29%
slipped 0.3% after posting better-than-expected fiscal first-quarter earnings on Friday, boosted by strength in its beer business where sales rose 11% due to strong growth for Modelo Especial, which recently replaced Bud Light as the bestselling beer in the U.S.

Apple Inc. shares
AAPL,
+2.31%
rose 2.3%, with the company clinching a market value of $3 trillion. Apple Wall Street analysts have grown even more bullish on the iPhone maker as the company was initiated with a Buy rating at Citi. Analyst Atif Malik set a price target of $240 on the stock.

Carnival Corp. shares
CCL,
+9.73%
jumped 9.7% after a broker upgrade, capping off what has been a strong month for cruise stocks.

Jamie Chisholm and Greg Robb contributed.
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June 30, 2023
‘Greedflation’ is replacing inflation as companies raise prices for bigger profits, report finds

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That’s the practice by many S&P 500 food and consumer companies of raising prices to protect what a new report calls their “cushioned corporate profits,” and it has enabled them to boost margins through the current inflationary period.

Companies including Kimberly-Clark Corp.
KMB,
-0.45%,
PepsiCo Inc.
PEP,
-0.18%,
General Mills Inc.
GIS,
-0.88%
and Tyson Foods Inc.
TSN,
-0.36%
have on recent earnings calls touted their ability to raise prices, earning tidy profits and rewarding their shareholders as they go, according to the report from Accountable.US, a liberal-leaning consumer-advocacy group.

And they have signaled their intention to continue to take “price actions” even as the Federal Reserve has hiked interest rates an unprecedented 10 times in an effort to tame inflation.

“Higher interest rates haven’t stopped S&P companies, especially in the big food industry, from raising consumer prices despite reporting billions in extra net earnings and over a trillion dollars in new giveaways to wealthy investors,” said Liz Zelnick, director of economic security and corporate power at Accountable.US.

“Corporate greed is a stubborn thing and requires serious action from Congress. The Fed has not seen an adequate return on its investment in a policy that has already created fissures in the economy that could lead to recession. It’s just not worth it,” she said.

Now read: Skip, pause or hike? A guide to what is expected from the Fed on Wednesday.

Accountable.US is not alone in calling out price hikes on essentials including food. Walmart Inc.
WMT,
+0.73%
is also unhappy with packaged-food companies that have steadily raised prices in dry grocery and consumable goods, according to a recent report from research company CFRA.

“Given Walmart’s enormous bargaining power over its suppliers, we expect the retail giant to push back on further price increases from its packaged-food suppliers,” he said. That is expected to hurt margins, especially if volume growth does not recover.

For more, see: Inflation in goods from cereal to soup has given a boost to consumer food stocks. Can Walmart help bring prices, both food and stock, down?

May inflation data released Tuesday found that food prices were up 0.2% from April, after remaining flat for the previous two months. Food prices are up 6.7% over the last year. The food-at-home index is up 5.8% over the last year, while the index for cereals and bakery products is up 10.7%.

Food prices started to rise about two years ago, when supply-chain issues and higher fuel and commodity prices led companies to pass some of those costs on to customers.

But companies appear determined to raise prices even more, despite a decline in shipping and gas costs. Gasoline was down 5.6% in May from April and fuel oil fell 7.7%, according to consumer-price-index figures.

Also read: U.S. inflation slows again, CPI shows, and might keep Fed on sidelines

Kimberly-Clark executives told analysts on its recent earnings call that the company is able to “rapidly implement broad pricing actions” and acknowledged that “pricing has continued to be a big driver behind our top-line growth.”

The company’s first-quarter earnings topped expectations and it raised guidance for the full year. That’s after it raised prices by 10% for a second straight quarter, driving margins wider by 340 basis points.

Shareholders were rewarded to the tune of $425 million during the quarter, the Accountable.US report notes.

See also: Colgate-Palmolive’s stock pops after earnings beat as company raises prices by double-digit percentage

PepsiCo Chief Executive Ramon Laguarta told analysts on that company’s recent earnings call that most of its price increases are behind it.

However, he said, “obviously, there are some markets, highly inflationary markets around the world, where we might have to take additional pricing. If you think about Argentina, Turkey, Egypt — those kinds of markets where the currencies are suffering. But the majority of our pricing is already done,” he said, according to a FactSet transcript.

PepsiCo’s 2022 earnings rose 16.9% to nearly $9 billion, and it spent more than $7.6 billion on stock buybacks and dividends, with the former up 1,313% from 2021.

General Mills, meanwhile, bragged about “getting smart about how we look at pricing” on its recent call. The parent of brands including Cheerios, Nature Valley, Blue Buffalo pet products and Pillsbury raised its fiscal 2023 guidance in February.

And Tyson executives touted the “significant pricing power of our portfolio with a year-over-year increase of 7.6%.” Tyson’s latest quarter included a surprise loss, as it was hit by weak demand for meat, along with plant closures and job cuts.

For more, see: Tyson Foods stock slides after meat producer swings to surprise loss

But Tyson had net income of over $3.2 billion in 2022, up from $3 billion in 2021, and it rewarded shareholders with $1.35 billion in buybacks and dividends.

For Accountable.US, it’s more compelling evidence that the Fed’s rate-hike strategy “has failed to root out one of the main drivers of inflation and should give the [Federal Open Market Committee] pause before lifting rates again this week to the detriment of jobs and the economy.”

The Consumer Staples Select Sector SPDR exchange-traded fund
XLP,
+0.36%
has fallen 1.6% to date in 2023, while the SPDR S&P Retail ETF
XRT,
+1.89%
has gained 4.6%. The S&P 500
SPX,
+0.62%
has gained 13% in the same period.

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June 13, 2023
U.S. inflation slows again, CPI shows, and might keep Fed on sidelines

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The numbers: U.S. consumer prices rose a scant 0.1% in May — held in check by cheaper gasoline — and could cement a decision by the Federal Reserve to “skip” an increase in interest rates this week.

The small rise in consumer prices matched the forecast of economists polled by the Wall Street Journal.

The Fed is meeting Tuesday and Wednesday to determine its next step in its fight against inflation. The central bank is widely expected to leave its benchmark U.S. interest rate unchanged at the end of its two-day meeting.

The yearly rate of inflation slowed to 4% from 4.9%, marking the lowest level since March 2021. Grocery and gas prices have been on the wane after helping drive up inflation last year.

Yet the so-called core rate of inflation that omits food and energy rose a stiffer 0.4% for the third month in a row, the government reported. Wall Street had forecast a 0.4% gain.

The Fed views the core rate as a better predictor of inflation trends. The increase in the core rate over the past 12 months slipped to 5.3% from 5.5%, the smallest gain since the fall of 2021.

These prices have fallen more slowly than the broader CPI, however, and suggest the fight against inflation is far from over.

Stock rose after the report. Treasury yields fell slightly.

Key details: A nearly 6% decline in seasonally adjusted gasoline prices was the chief reason for the low inflation reading in May.

The cost of groceries rose slightly in May after two declines in a row. Still, the yearly increase slowed to 5.8% last month from a peak of 13.5%.

What helped is a big drop in the cost of eggs. Prices sank 14% last month and have returned to normal. They spiked last year after a severe bout of avian flu.

The cost of eating out or getting takeout is still rising rapidly, however.

Housing, the single biggest category of the CPI, has become perhaps the biggest sore spot on the inflation front. Rents rose a sharply again and are up almost 9% in the past year.

Prices of used vehicles jumped for the second month in a row, but they’ve been on a downtrend over the past year.

Big picture: The doggedly high rate of inflation is far from the Fed’s 2% target and senior officials think it could take a few years to reach its goal.

The big question for the Fed is whether to raise interest rates again.

The Fed has jacked up a key short-term rate by 5 percentage points since the spring of 2022 from near zero. Now it wants to see how higher borrowing costs affect inflation and economic growth. That’s why many senior Fed officials appear to prefer to skip a rate hike this week.

If core inflation doesn’t subside more rapidly, however, the Fed might be forced to raise rates again and boost the odds of recession.

Looking ahead: “The largest risk to the economic outlook—that inflation would prove sticky, requiring the Fed to throw even more cold water on the economy—appears to have receded,” said chief economist Julia Pollack of ZipRecruiter.

“The drop in year-on-year inflation may give the Fed license to slow the pace of tightening, but not to pause long term unless participants are convinced inflation will slow further,” said chief economist Chris Low of FHN Financial.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.43%
and S&P 500
SPX,
+0.69%
rose in Tuesday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.827%
increased slightly to 3.78%.

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June 13, 2023
Here’s where inflation is hurting Americans the most

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Inflation in the U.S. has slowed from a 40-year peak of 9% last year, but prices are still rising rapidly and putting great stress on household budgets.

Topping the list is rent — the single biggest expense for people who don’t own homes. Putting food on the table, caring for young children and owning a car have also become a lot more expensive.

See the accompanying table to view where inflation is hurting Americans the most.

The cost of groceries isn’t rising as fast as it was last year, but putting food on the table is much more expensive now compared to a few years ago.

frederic j. brown/AFP/Getty Images

The latest consumer price index, due Tuesday, is likely to show a further slowdown in inflation. Yet the cost of many goods and services remains stubbornly high and isn’t coming down as fast as the Federal Reserve would like.

The Fed will meet Wednesday to weigh whether to raise interest rates for the 11th straight time since the spring of 2022. Wall Street widely expects the central bank will pause or skip a rate hike this month to see how much its prior increases are cooling off the economy.

The rate of inflation, based on the CPI, has decelerated to a yearly pace of 4.9% as of April.

The core rate that excludes food and energy has tapered off to 5.5% yearly pace from a peak of 6.6% last fall.

The bad news for the Fed is that core inflation, viewed as a more accurate predictor of future inflation trends, has gotten stuck at an uncomfortably high level.

The core rate has been flat at 5.5% to 5.6% since the start of the year, leaving it well above the central bank’s long-run target of 2% inflation.

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June 12, 2023
High inflation to take longer to tame and keep Fed on hot seat, Wall Street pros say

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Persistent inflation is likely to keep U.S. interest rates high through 2023 and leave the U.S. susceptible to recession, financial-industry economists say.

“The inflation picture is very complicated,” said Lindsey Piegza, chief economist of the brokerage Stifel. She is also chairwoman of the economic roundtable at the Securities Industry and Financial Markets Association.

The increases in prices have proven to be “quite sticky,” she said, and could leave inflation near 4% by the end of the year. That’s double the Federal Reserve’s 2% goal.

In its twice-a-year forecast, SIFMA predicted the U.S. economy would slow sharply by the end of the year due to higher interest rates. The Fed is expected to either raise rates again later in the year or keep them above the current 5% to 5.25% for some time.

The central bank is not expected to raise rates at its meeting next week, however. Financial-industry economists believe the Fed will skip a rate hike and reassess the economy at its July meeting.

Some 69% of the more than two dozen SIFMA economists surveyed see an upcoming recession, but that was down from 83.3% at the beginning of the year.

For inflation to decline further, economists believe the U.S. unemployment rate needs to rise to as high as 4.5% from the current 3.7% rate. That would ease the upward pressure on wages and make it easier for the Fed to get prices under control.

The cost of labor has become one of the biggest worries among economists in the fight against inflation. Wages have risen sharply and added to the price pressures.

The supply shortages that were a big source of inflation in 2021 and much of 2022 have largely evaporated, economists note.

Seaborne freight charges have fallen back to prepandemic levels, for example, and ships are no longer stuck outside ports.

The number of ships in the cue in Los Angeles-area ports has fallen to single digits from a peak of 107, Piegza noted.

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June 8, 2023

Food Prices Fell in May, Easing Inflation Pressures on Consumers

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By Yusuf Khan

Central bankers have been given another shot in the arm for their fight against inflation as the cost of key foodstuffs fell in May, with prices now down more than 20% from the record high set in March 2022, according to a United Nations report released Friday.

The Food and Agriculture Organization of the United Nations’ price index, which tracks global prices for a basket of staple foods, averaged 124.3 points in May, down 2.6% from April’s level and just over 22% lower than the record set following Russia’s invasion of Ukraine in February 2022.

In particular, declines were led by cereals, oils and dairy products, which should help ease inflation pressures for policy makers around the world. Persistently higher prices for commodities such as energy, food and industrial goods have been a common trend since before Russia’s war with Ukraine, but food prices especially jumped following the invasion due to worries that exports would be halted from the Black Sea. The establishment of the Black Sea Grain Initiative, which last month was extended further, has eased pressures.

The FAO’s cereal price index averaged 129.7 points in May, down 4.8% from April. The UN body said this was largely led by a drop in corn prices, which fell almost 10% through the month. Wheat prices were also down 3.5% through May, with the expectation of ample stocks likely to be maintained in the coming year. Prices for grains are now more than 25% lower than where they were a year ago, the FAO said.

“A favorable outlook for 2023-24 pointing to a rebound in global supplies, with higher production expected in Brazil and the United States of America, two major exporters, weighed on prices,” the FAO said. That said, rice prices did inch higher through the month, with supplies tightening in Pakistan and Vietnam.

Meanwhile, the vegetable-oil price index fell 8.7% in May, with lower quotations for palm, sunflower, rapeseed and soy oil, amid ample global supplies especially for soy oil. Prices are now nearly half the price of a year ago, the UN body said.

Dairy prices also moved lower, by 3.2% to 118.7 points in May, the FAO said, with lower prices of cheese dragging prices, which are down by 17% from May 2022.

However, meat prices climbed by 1% on month in May, led by higher prices for cattle, with tightening supplies in the U.S. and higher demand for Brazilian beef. Poultry prices also moved higher as various regions battle with avian-flu outbreaks. Pig meat prices rose for the fourth successive month on higher production costs and increased demand for Brazilian pork.

Sugar prices also rose on month, by 5.5%, marking the fourth month in a row of rising prices. Lower-than-expected export availability coupled with concerns as to how the El Nino will affect growth this year, were to blame, according to the UN body. “Shipping delays amid strong competition from soybean and maize in Brazil also supported the increase in world sugar prices.”

Write to Yusuf Khan at yusuf.khan@wsj.com

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June 2, 2023

UK Inflation Fell Less Than Expected to 8.7% in April
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```
By Ed Frankl
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The U.K.’s inflation rate fell less than expected in April, kept elevated by rising food prices, and the closely watched core rate unexpectedly rose, indicating that the Bank of England may need to raise interest rates again to halt persistently high prices.

Consumer prices increased 8.7% in April compared with the same month a year earlier, down from March’s 10.1% on-year rise, data from the Office for National Statistics showed Wednesday.
Economists expected inflation to decline more, to 8.2%, according to a poll by The Wall Street Journal.

Core consumer prices–a measure that excludes the volatile categories of food and energy–was 6.8% in April, compared with 6.2% in the prior month, and well above expectations of 6.1%, as the services inflation, a key component, rose.

Write to Ed Frankl at edward.frankl@wsj.com
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May 23, 2023
The U.S. economy might still be too strong for its own good

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The economy is slowing all right, but oddly, it might still be too strong to get inflation to fall much faster and help the U.S. avoid recession.

Gross domestic product, the official scorecard of the economy, decelerated to a 1.1% annual rate of growth in the first three months of this year. That’s down from 2.6% and 3.2% in the prior two quarters.

The slowdown in growth is exactly what the Federal Reserve is aiming for.

The central bank is trying to pull a rabbit out of a hat by cooling off the economy enough to extinguish the highest inflation since the 1980s and avoid a recession at the same time.

To achieve its goal, the Fed has jacked up a key U.S. interest rate above 5% from near zero over the past 15 months. Higher borrowing costs slow the economy by reducing consumer spending and business investment.

The strategy appears to be working. The yearly rate of inflation tapered off to 4.9% in April from a 40-year peak of 9.1% last summer.

Yet it’s far from clear the economy will slow enough to put inflation on a track to reach the Fed’s 2% target without further interest-rate increases. The Fed raised rates again earlier this month, but signaled it hopes to stand pat for the rest of the year.

The early evidence in the second quarter is mixed.

Consumer attitudes about the economy soured in May amid talk of recession and looming U.S. debt-ceiling crisis, for one thing.

Americans have also cut spending on many big-ticket items such as furniture and appliances and they are leery of taking on major new debt. Since last summer the savings rate has almost doubled to 5.1% from a 17-year low .

The latest earnings report from Home Depot underscores the problem.

Home Depot posted lower first-quarter profits and said sales this year could fall for the first time since 2009, when the U.S. was exiting a severe recession.

The popular retailer sells many expensive goods such electric tools and appliances and provides the materials needed for many major home projects. These are the sorts of purchases Americans are putting on hold.

Yet other measures show the economy is still expanding at a modest pace — and that it may have even perked up.

Take retail sales. They rose in April for the first time in three months, led by an increase in auto sales.

“Retail sales came in strong again, showing how the consumer isn’t showing any signs of slowing down,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance

Steady demand for new cars and trucks, in turn, has spurred automakers to ramp up, especially with shortages of key parts continuing to ease. U.S. industrial production rose 0.5% in April after stalling out for two months, mostly because of the auto industry.

Auto sales are on track to increase sharply this year after falling to an 11-year low in 2022. Why is that a big deal? Recessions are basically unheard of absent an outright decline in car buying.

It’s not just cars, either.

Consumers aren’t spending as much on goods, but services are another matter. They have spent the bulk of their discretionary income on travel, recreation and dining out, the sort of things that are the first to go when times get tough.

Hotel bookings, plane-ticket purchases and dinner reservations are all near pre-pandemic peaks — definitely not a sign of an approaching recession.

The early read on second-quarter GDP, not surprisingly, is fairly positive. The Atlanta Federal Reserve’s GDPNow estimates growth at 2.9%. JPMorgan is more modest at 1%. And Nomura is at 0.7%.

What’s keeping the economy going despite sharply higher borrowing costs is the strongest labor market in decades. Businesses are still hiring and the economy is still adding jobs, keeping the unemployment rate at an extremely low 3.4%.

Even a recent increase in layoffs, as represented by rising jobless claims, overstates emerging weakness in the labor market. Major fraud in Massachusetts appears to have exaggerated how many job losses are taking place in the economy.

A tight labor market would normally be a great thing. Now it’s a double-edged sword.

Workers are reaping bigger pay increases to help them cope with higher prices, but rapidly rising wages are also adding to high inflation. Businesses have tried to offset higher labor costs partly by charging more for their goods and services.

The uber-strong labor market leaves the Fed in a bind.

If job openings and hiring don’t weaken a lot further, the economy is likely to grow fast enough to maintain the upward pressure on inflation. The Fed could be forced to come off the sidelines and raise interest rates again, raising the odds of a recession.

Several senior Fed officials indicated this week they have not seen enough evidence to support a freeze in interest rates for the rest of the year.

“Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate,” said Fed Gov. Michelle Bowman.

Even if the Fed doesn’t raise rates again, though, many Wall Street
DJIA,
-0.33%
economists think a recession is inevitable by the end of the year. They view the seeming green shoots in April as a feint, pointing to softer consumer spending, waning business investment and the slumping housing and manufacturing industries.

“The march to recession continues, with some rest stops along the way,” said chief economist Steve Blitz of TS Lombard.

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May 21, 2023
U.S. April producer prices rise 2.3% over past year, smallest increase since January 2021

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The numbers: U.S. producer prices rose 0.2% in April, the Labor Department said Thursday.

Economists polled by the Wall Street Journal had forecast the PPI would rise 0.3%.

In the 12 months through April, the PPI increased 2.3%. It follows a 2.7% gain in March. This is the lowest rate since January 2021.

Key…

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May 11, 2023
Wall Street cheers latest inflation report, but some say it could spell trouble for stocks down the road

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Wall Street embraced the U.S. April consumer-price index, a closely watched inflation gauge published Wednesday, with cautious optimism.

But some Wall Street analysts are worried inflation might not be slowing quickly enough to satisfy the market’s expectation for as many as three interest-rate cuts by the Fed before the end of the year.

U.S….

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May 10, 2023
U.S. stocks struggle for direction as traders digest inflation data in April

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U.S. stock indexes were little changed in choppy trade on Wednesday after data showed U.S. consumer price inflation cooled to the lowest annul rate in two years in April, though the core inflation, which excludes food and energy prices, remained high.

How are stock-indexes trading

On Tuesday, the Dow Jones Industrial Average fell 57 points, or 0.17%, to 33562, the S&P 500 declined 19 points, or 0.46%, to 4119, and the Nasdaq Composite dropped 77 points, or 0.63%, to 12180.

What’s driving markets

Stocks…

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May 10, 2023
ECB not ready to ‘pause’ rate hikes as inflation fight continues, Lagarde says

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The European Central Bank on Thursday lifted interest rates by 25 basis points, slowing the pace of tightening as it delivered a seventh straight increase, indicating it’s not ready to press the pause button.

“We are not pausing,” ECB President Christine Lagarde told reporters at a news conference, adding that the stance was “very clear.”

The increase lifted the ECB’s main rate to 3.25%, near a 15-year high.

“The inflation outlook continues to be too high for too long,” the ECB Governing Council said in a statement at the conclusion of its policy meeting.

“Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain,” the ECB said.

Lagarde told reporters that the lending survey informed the decision to lift rates by a quarter point rather than a half point. She said there was a strong consensus behind the quarter-point move, while acknowledging some policy makers had preferred a half-point hike.

The euro
EURUSD,
-0.38%
initially slumped after the statement, but rebounded sharply to trim a loss versus the U.S. dollar after Lagarde said the ECB wasn’t prepared to pause the rate-hiking cycle. The euro was down 0.2% at $1.1035 after trading as low as $1.1003. The euro has rallied 3% versus the dollar so far in 2023.

European government bond yields were also lifted after Lagarde ruled out a pause. The yield on the 10-year German government bond
TMBMKDE-10Y,
2.242%,
or bund, was up around a half of a basis point at 2.289%.

The ECB move comes after the Federal Reserve on Wednesday delivered a 10th consecutive rate increase, but signaled that it was prepared to hold off on further tightening depending on incoming economic and financial data. Asked if the ECB could continue on a tightening path if the U.S. central bank paused, Lagarde dismissed the notion that ECB decisions were “dependent” on the Fed.

Market participants, meanwhile, have priced in three Fed rate cuts by year-end. The ECB, in contrast, was expected to deliver further monetary tightening.

Inflation in the eurozone continued to run at a 7% year-over-year clip in April, roughly in line with market expectations, but a modest acceleration from March. Core inflation, excluding food, energy, alcohol and tobacco, ticked down a tenth to 5.6% from 5.7%.

A slowing eurozone economy, however, has bolstered arguments for bringing the monetary tightening cycle to an end, economists said. The ECB’s bank lending survey released Tuesday showed a tightening in conditions, with the largest tightening in credit standards for the last two quarters since the sovereign debt crisis.

The ECB in March shrugged off worries about the banking sector, delivering a half-point rate hike but signaling that future decisions would be made on a meeting-by-meeting basis, abandoning a longstanding policy of “forward guidance” aimed at massaging market expectations around future rate moves.

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May 4, 2023
Americans’ personal savings just hit $1 trillion. What’s the best place to store your cash — I-bonds, CDs or online savings accounts?

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People are saving more these days. Where’s the best place to put your cash?

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April 28, 2023