This Week’s Inflation Data Could Make Investors Rethink Fed Pause

When the Consumer Price Index inflation report for April is released ahead of the open Wednesday, it will likely set the tone for the market

The consensus estimate is for headline inflation to rise by 0.4% month-on-month, up from 0.1% in March, and by 5% year on year, unchanged from the previous reading.

Core inflation, which includes energy and food, is predicted to stay at 0.4% month-on-month, as in March, and dip from 5.6% to 5.5% year-on-year. 

April’s inflation report comes after a slew of better-than-expected economic data for the U.S. economy, after non-farm payrolls sharply surprised last month, rising by 253,000 versus 180,000 expected, and with the unemployment rate returning to multidecade lows. 

Investors Expect No Fed Hike In June

The Fed raised interest rates by 0.25% to 5%-5.25% last week and indicated that future adjustments are now dependent on economic data — labor market developments and inflation.

Market participants are strongly confident this was the last rate hike and the Fed will hold in June by assigning a 90% probability, according to CME Group’s Fedwatch

Unexpectedly strong inflation data might be an unwelcome surprise for investors, particularly for tech-related equities, after the Invesco QQQ Trust QQQ closed Friday at the highest level since the end of August 2022. 

Bank of America economists Stephen Juneau and Michael Gapen maintain April CPI projections that are in line with the consensus.

“Unlike in March and February, we expect energy prices rose by 1.2% m/m in April owing in part to the effects of the announced production cuts by OPEC+,” the economists said, adding that “energy services likely fell on the month given further declines in natural gas prices.”

BNP Paribas forecasts a 0.4% m/m increase for the headline CPI number, which is in line with the consensus, and a 0.4% increase for the core, which is one-tenth above the consensus.

According to Carl Riccadonna, chief economist at BNP, Fed officials will likely be wary of acknowledging inflation progress in order to avoid being caught off guard by yet another false dawn and will likely require several more months of sustained improvement before softening their inflation assessment.

ING’s chief economist James Knightley sees headwinds for the U.S. economy intensifying and expects the annual inflation rate to slow to 4.9% in April. “Recessionary forces will push inflation close to target by year-end, with unemployment rising,” resulting in “50bp interest rate cuts at both the November and the December FOMC meetings,” according to the Dutch bank.

Bill Adams, chief economist for Comerica Bank, forecasts headline CPI dropping from 5% to 4.8% in April. 

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