Shoppers at a grocery store in San Francisco, California, USA, on Monday, May 2, 2022.
David Paul Morris Bloomberg | Getty Images
The April report on the consumer price index is expected to show that inflation has already peaked – a development that, according to some investors, may temporarily calm the markets.
But economists argue that even with a delay in headline inflation, core inflation could rise monthly and remain high for months to come. Core inflation excludes spending on food and energy.
According to the CPI report, inflation in April rose by 0.2%, or 8.1% over the same period last year, according to Dow Jones. This is compared to a colossal increase of 1.2% in March or 8.5% over the same period last year. April data is expected Wednesday at 8:30 a.m. ET.
The main CPI is expected to grow by 0.4% or 6% over the same period last year. This is compared to 0.3% in March, or 6.5% year on year.
Shares on Tuesday revolved ahead of long-awaited data. The S&P 500 ended the day up 0.25% and the Nasdaq added 0.98%. The Dow Jones industrial index lost 84.96 points.
Yields of closely watched 10-year Treasury bonds fell to about 2.99% on Tuesday after rising sharply to 3.20% on Monday. Bond yields – moving the opposite price – are rising rapidly due to expectations of an aggressive increase in Federal Reserve interest rates.
“I wouldn’t say that tomorrow’s CPI matters on its own. I think the combination of March, tomorrow and May will be a turning point,” said Ben Jeffery, a fixed-income strategist at BMO.
But Jeffery said the report has a good chance of becoming the engine of the market no matter what.
“I think it will either reinforce the sales pressure that we’ve seen that took 10 seconds to 3.20% … Or I think it will cause more interest in buying from investors who have been waiting for signs that inflation is starting reach a peak, ”he said. .
A potential turning point for stocks
In the stock market, some investors argue that these figures could be a turning point when April inflation comes as expected or will be even weaker.
“I think the market, technically, is very focused on trying to predict how much the Fed is going to move,” said Tony Roth, chief investment officer of Wilmington Trust Investment Advisors.
A hotter report would be negative, as it could mean the Fed will take an even tougher stance on interest rates. Last week, Fed Chairman Jerome Powell said the central bank could raise rates by 50 basis points, or half a percent, at each of the next few meetings.
The market was nervous because of inflation and the fact that the Fed’s response to it could cause a recession.
“I don’t think this is the end of the market drawdown … The market should go down by at least 20%. If we get a series of better inflation data, I think 20% could be the bottom line,” Roth said. The S&P 500 fell nearly 17% from its high.
“If inflation is not as good as we think, not only this month but in the coming months, then I think market prices are in recession and then they’re down from 25% to 40%,” Roth said. .
There are two risks
Roth said there are two potential exogenous risks in inflation data, and each could prove to be a challenge for markets. One is the unknown problems with oil and gas supplies and price shocks caused by Russia’s invasion of Ukraine, and the other is China’s recent Covid-related shutdowns and impact on supply chains.
“No one knows how they will play … Any of them could be a bigger problem than the market is waiting for now,” Roth said.
Annette Markowska, Jefferies ’chief financial economist, said she expects a report that will be hotter than the consensus, with a headline CPI growth of 0.3% and a core jump of 0.5%. She believes the market is wrong and investors should be more concerned about how much inflation may fall.
“I think a lot of people are focusing on slowing down the annual rate, and I think that’s helping consumers because it looks like real wages will actually be positive for changes in April on a month-to-month basis,” she said. “But if we go back to the 0.5% core acceleration we predict, that’s a problem for the Fed. If on an annualized basis you get 6%, and that really will mean no slowdown.”
Markovska noted that the central bank expects inflation to slow to 4% this year and 2.5% next. “The question we need to ask is whether we are on track to reach that forecast, and if not, the Fed may have more policy overruns than they thought,” she said.
It is believed that the problems with inflation are due to supply chains, but these problems are disappearing, Markovska added.
“I think this ship has sailed. We have passed the supply chain. This is the service sector. This is the labor market,” she said. “Just because we are reaching a peak and inflation of commodities is declining, it does not solve the problem. The problem is now everywhere. It is in services. It is in the labor market and it will not disappear by itself … We need core inflation to fall to 0.2%, 0.3% compared to the month, and we need it to stay on that for a while. ”
American Barclays economist Puja Sriram said she did not believe that investors should admire the peak of inflation, because it is important how quickly this level decreases.
“To reassure the Fed that inflation is falling, we need to get a really weak core CPI,” she said. “The main CPI will be hard to lower because the energy component is fluctuating.”
The energy index rose 11% in March, and it may contribute less to headline inflation in April as gasoline prices fell. Economists say energy will be a bigger problem in the May data as gasoline rises to record levels again.
Some economists expect used car prices to fall in April, but Markovska said the data she monitors shows growth at the retail level.