Financial News Highlights

  • Inflation, as measured by the Consumer Price Index, accelerated to 3.5% year-on-year in March – the highest reading in six months in financial news.
  • Minutes from the Federal Reserve meeting in March showed that officials remained in favor of exercising patience amid persistent inflationary pressures.
  • U.S. Treasury yields spiked roughly 15 basis-points as market expectations for lower interest rates were pushed back into the second half of the year.

One Hundred Days into 2024, Rate Cuts Remain on the Horizon

Financial News Chart 1: The chart shows the year-on-year percentage change in the CPI shelter and CPI excluding food, energy, and shelter indexes over the past year. Shelter inflation has fallen considerably over the past year but declines began to moderate over the past few months. For CPI excluding food, energy, and shelter, inflation was at the Fed's 2% target late last year but began to accelerate in 2024.Financial markets were caught off-guard this week in financial news as slightly hotter than expected inflation data prompted a spike in U.S. Treasury yields and a modest retreat in equity prices. As of the time of writing, the ten- and two-year Treasury yields finished the week up roughly 15 basis-points (Chart 1), while the S&P 500 fell 0.9%. While the deviation relative to expectations for the March Consumer Price Index (CPI) inflation was marginal, the underlying details proved to be more concerning.

Headline inflation in March jumped to 3.5% year-on-year, with energy prices seeing positive price growth in annual terms for the first time in over a year. Excluding energy and food prices, core inflation remained unchanged relative to February at 3.8%. The reason why the disinflation process stalled in the first quarter is related to two factors. The first is that disinflation in the heavily weighted shelter subcategory moderated relative to the previous quarter. While this offered less support to the Fed’s mission to reattain price stability, the measurement of shelter prices is lagged relative to market trends by several months, and thus the direction of shelter inflation is still expected to be downward moving forward.

The second factor keeping inflation elevated was the acceleration in price growth for categories excluding food, energy, and shelter – aggregately referred to as super core inflation. Inflation pressures within this subcategory were broad-based in the first quarter (Chart 2) which has not gone unnoticed by the Federal Reserve. In the March meeting minutes released this week, FOMC participants noted they were reluctant to discount the inflation data of the first quarter and emphasized that they would require greater confidence that inflation was on a sustainable trajectory back to the 2% target before considering less restrictive policy options.

Financial News Chart 2: The chart shows the 10- and 2-year U.S. Treasury yields over the past year. After peaking in late October above 5%, both declined through the end of the year before heading higher in 2024. With the spike over the past week, both yields are back to where they were in mid-November of last year.This lined up with the even-toned statements made by Federal Reserve officials this week, including Vice Chair and New York Fed President John Williams who stated that he expects “inflation to continue its gradual return to 2 percent, although there will likely be bumps along the way, as we’ve seen in some recent inflation readings”. In a speech this week, Boston Fed President Susan Collins also stated “Overall, the recent data have not materially changed my outlook, but they do highlight uncertainties related to timing, and the need for patience”. Market pricing for the first Federal Reserve cut this year shifted from June to July this week, although market confidence remains weak with the balance of risks skewed towards the potential for a later commencement date.

Looking to next week, we receive an update on retail sales for March on Monday, which are expected to show slower growth relative to the prior month, in part owing to a moderation in auto sales. Next week also marks the start of the Spring IMF meetings, which will include meetings between the Fed and the U.S. Treasury and their international counterparts, in addition to the publication of the IMF’s updated World Economic Outlook.

 

Andrew Foran, Economist | 416-350-8927

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