Inflation dips ahead of Fed meeting. March core personal consumption expenditures, the Federal Reserve’s (Fed) preferred inflation measure, increased 1.6% year over year in March, its slowest pace since September 2017. The reading fits with recent Q1 gross domestic product data and comes just as the Fed kicks off a two-day monetary policy meeting. The data also showed a modest uptick in personal spending (0.9% vs 0.7% consensus estimate), while incomes rose 0.1% month over month, below the 0.2% economists were expecting.
Rate cut? Markets have frequently underestimated Fed actions in this cycle, but lately, the skepticism has been striking. Fed fund futures traders are increasingly positioning for a Fed rate cut, even after last quarter’s 3% output growth and a notable uptick in economic data. In today’s LPL Research blog post, we’ll dig into fed fund futures’ expectations of policy, and the history behind rate cuts in similar conditions.
Yield curve steepening. Though the yield curve remains inverted at some shorter maturities, we have seen some recent steepening in short-term rates compared to long-term; the spread between the 2-year and 10-year yield hit its widest level since December. With fed fund futures pricing in no further hikes this year, the short end should remain well anchored, while steady growth and a modest pick-up in inflation would be likely to push the long end higher, a combination that would lead to further curve steepening. Inflation remains the wild card, since an unexpected pick-up in inflation would bring the Fed back into play. But inflation continues to look well-contained after data came in below expectation this week, which should give the Fed plenty of leeway to keep any additional hikes on hold.
NEW Market Signals podcast. Listen to this week’s episode, where LPL Chief Investment Strategist John Lynch and Senior Market Strategist Ryan Detrick discuss the new highs in the S&P 500 Index, the “Sell in May” theme, and signs of an improving economy. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts!
- Pending Home Sales (MoM, Mar)
- Conference Board Consumer Confidence Index (Apr)
- Germany Unemployment Claims Rate (Apr)
- Eurozone Unemployment Rate (Mar)
- Eurozone GDP Report (Q1)
- Germany CPI Report (Preliminary, Apr)
- Canada GDP Report (Feb)
- Nikkei Japan Manufacturing PMI (Apr)
- S&P CoreLogic Case-Shiller Home Price Index (MoM, Feb)
- Markit US Manufacturing PMI (Apr)
- ISM Manufacturing PMI (Apr.)
- Federal Reserve Rate Decision (May)
- Caixin China Manufacturing PMI (Apr)
- ADP Employment Report (Apr.)
- Durable Goods Orders (Mar)
- Markit/BME Germany Manufacturing PMI (Apr)
- Markit Eurozone Manufacturing PMI (Apr)
- Initial Jobless Claims (Apr. 27)
- Unemployment Rate (Apr)
- Markit US Services PMI (Apr)
- Markit US Composite PMI (Apr)
- ISM Non-Manufacturing Index (Apr)
- Eurozone PPI Report (Mar)
- Eurozone CPI Report (Preliminary, Apr)
- Nonfarm Payrolls Report (Apr.)
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