【MACRO Alert】U.S. April CPI fell as expected, with growing market expectations of Fed rate cuts

The United States released the Consumer Price Index (CPI) data for April. The unadjusted CPI for April recorded an annual rate of 3.4%, slightly lower than the previous month's 3.5%, in line with market expectations. The core CPI for April fell to 0.3%, the lowest since December last year. Meanwhile, April's retail sales unexpectedly remained flat at 0%, below market expectations of 0.4%.

This marks the first decline in CPI in six months, indicating a easing of price pressures, which may prompt the Federal Reserve to maintain high interest rates for a longer period. With the core CPI suggesting a slowdown in inflation, the market predicts a possible rate cut by the Fed in September, driving the S&P 500 and Nasdaq 100 indices to record highs. Additionally, some Wall Street banks have raised their year-end targets for the S&P 500 due to expectations of a rate cut, with Brian Belski, a strategist at Montreal Bank, raising his target by nearly 10%, reflecting confidence in the market's upward momentum. However, April's U.S. retail sales showed no growth, indicating a stagnant growth that may require more evidence to support a rate cut decision, despite the significant rebound in the market from last year's lows, demonstrating strong recovery momentum.

Following the release of CPI data, significant movements occurred in the financial markets. The price of spot gold rose by $15 in a short period, while spot silver climbed to $29 per ounce, reaching a new high since April 16th. Concurrently, the U.S. Dollar Index (DXY) sharply dropped by nearly 40 points, with the intraday decline against the Japanese yen reaching 1.00%. In the bond market, the yields on U.S. 2 to 10-year Treasury bonds fell by over 10 basis points intraday following the CPI data release.

Reflecting in the short-term interest rate futures market, there is an increased market expectation for the Fed to accelerate its rate cuts in 2024 after the data release. Traders have bolstered their bets on rate cuts in September and December. In the UK, interest rate futures have fully priced in two 25-basis-point rate cuts by the central bank before November, slightly increasing from the rate cut expectations before the data release. Additionally, there has been an increase in bets on rate cuts by the European Central Bank in 2024, with the expected magnitude of cuts reaching 73 basis points, up from the previous 71 basis points.

Recently, the USD/JPY exchange rate fell below the 154 level during the Asian trading session, easing pressure on Japan to possibly intervene in the market. Previously, in April, the yen had fallen below the 160 level and quickly rebounded after suspected official intervention. The slowing growth in the U.S. core CPI data has pushed market expectations for an imminent rate cut by the Federal Reserve, further impacting the USD exchange rate. Japan's GDP unexpectedly contracted by 2% in the first quarter, indicating a fragile economic recovery, dragged down by declines in private consumption, capital expenditure, and net exports.

Meanwhile, special events such as earthquakes and industrial scandals have exacerbated economic challenges. Despite signs of policy adjustments by the central bank and market intervention, experts believe that the yen is under pressure in the short term due to interest rate differentials between the U.S. and Japan. Former U.S. Treasury Secretary Summers pointed out that even massive currency interventions would have difficulty effectively changing exchange rate trends, strengthening market doubts about the effectiveness of interventions.

Macro analysts suggest that given the recent soft performance indicated by the CPI report, the Atlanta Fed should consider revising down its growth forecast for this quarter. Despite optimistic financial asset performance, it is important to note that the inflation rate for super core services remains higher than the Fed's expectations. David Kelly from J.P. Morgan Asset Management suggests that the U.S. economy is moderately slowing down, with inflation undergoing a downward phase, and he believes a rate cut in September is possible. Kelly also predicts that the economy will transition towards “long-term normal” rather than “long-term elevated.”

Tom Porcelli from PGIM Fixed Income describes the current situation as a “recalibration period,” criticizing Powell while acknowledging his recent good performance, and believing that the Fed chair supports a rate cut. Rubeela Farooqi from High Frequency Economics points out that although price pressures remain relatively high, the overall trend is on track, and advises the Fed to maintain patience in policy decisions. Jeffrey L. Kleintop from LPL Financial believes that the Fed is unlikely to start cutting rates until there is more conclusive evidence of consumer price slowdown.