Via a note from Bank of America following the CPI report which led everyone to expect, once again, faster rate cuts.
This in brief:
- While the report is certainly positive compared to the ugly reports earlier in the year, it’s only been a month and we think it’s not a big enough milestone for the Fed to get overly excited.
- Based on our reading of PCE inflation, we expect core PCE to come in at 023% m/m or 2.8% annualized.
- As a result, inflation in April is an improvement over the first quarter, but still above the Fed’s 2% target.
- As a result, we maintain our call for the first reduction to take place in December
Not sooner, says BoA:
- On the other hand, market prices estimate that one reduction in September and two reductions this year are very likely. Continuation of the report. Markets are now pricing in nearly two full 25 basis point cuts by the end of the year and a more than 85% chance of a cut by the September meeting. We think inflation data will have to slow much further or labor market data will have to weaken before the September rate cut can actually take effect.
I’m not going to cut rates based on a slightly improving CPI report. And, let’s face it, the improvement was only marginal.
This article was written by Eamonn Sheridan at www.forexlive.com.
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