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US inflation data fuels bets on Fed rate cut as early as September

Traders work on the trading floor during the morning session at the New York Stock Exchange on May 14, 2024.

Spencer Platt | Getty Images

Traders appear increasingly confident that the U.S. Federal Reserve could begin cutting interest rates as soon as September, after inflation data cooled more than expected in April.

Some analysts, however, are far from convinced.

The Consumer Price Index (CPI), a broad measure of the cost of goods and services at checkout, increased 0.3% from March, the Labor Department’s Bureau of Labor Statistics reported Wednesday. This was slightly below the Dow Jones estimate of 0.4%.

Weaker-than-expected data on Wednesday sent stocks to new record highs and fueled speculation about when the Fed might be ready to start cutting rates.

Traders currently rate the chance of a US rate cut in September at around 70%, according to the CME FedWatch tool. This represents a sharp increase from the start of the week.

Jerome Schneider, head of short-term portfolio management at PIMCO, said Thursday that the latest U.S. inflation data confirms to investors that the possibility of rising short-term rates is now “off the table.” .

“I think from a more contextual perspective, we really need to understand that we celebrated a lower inflation rate, as the market did. But, contextually, at PIMCO, we are specifically thinking about the longer-term trajectory of the Fed’s reaction to this data,” Schneider told CNBC’s “Squawk Box Europe.”

“More importantly, when you look at what’s happening in the CPI and Personal Consumption Expenditures Price Index segments, the Federal Reserve’s most widely used inflation indicator, it remains relatively resilient. In fact, to get below a 3% figure in these base numbers, we will need to see prints over the rest of the year of 0.2% or less. we’re still well above that number,” Schneider said.

“Yes, it may be some relief from higher inflation, but in the context of moving closer to the Federal Reserve’s goal that it wants to achieve so quickly, it is probably unlikely at this time. stadium,” he added.

Softer data

Along with U.S. inflation data, the Commerce Department reported Wednesday that retail sales remained flat for the month, compared with an estimate of a 0.4% increase. The report appears to show that consumer spending in the world’s largest economy has lost some momentum.

“If you compare the inflation data with the retail sales data from earlier in the week, where it was a decent miss and the discretionary sectors were really weakened, it tells us a story of a consumer which, under the hood, is starting to feel the effects of these higher rates,” Jacob Mitchell, chief investment officer and founder of Antipodes Partners, told CNBC’s “Squawk Box Europe” on Thursday.

“I think the market is probably starting to see weaker data coming in, which will make the Fed’s job a little bit easier.”

Asked if the CPI data suggested the Fed was close to cutting rates in September, Mitchell replied: “Look, I would agree that you didn’t get what you needed in terms of key components, services and rent equivalent to the landlord.”

He added: “And those two things, look, if we don’t get much lower property numbers, then in the second half of the year you’re going to have base effects coming in, so you’re going to see a natural reacceleration of basic activity. CPI.”

— CNBC’s Jeff Cox contributed to this report.

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