4/12/24 – Sticky inflation forces rethink on Fed’s December pivot

If you’re thinking there has been a sea change in expectations this week, it’s because there has been.  The March Consumer Price Index slammed the door on any hopes of a near-term rate cut with the year-over-year core CPI rising 3.8%.  The CPI seems to have settled in at the 3.8% annual rate which is a level that is too high for the Fed to cut interest rates anytime soon.  Reflecting that, many of the “Street” economists have withdrawn their forecast for a June rate hike and the possibility of two additional cuts this year and have now taken the safe forecast of one rate cut this year coming at the December meeting.  Indeed, the Fed Fund futures have priced in a singular rate cut in the December contract.

That repricing of the overnight rate is having a direct impact on the price of the U.S. dollar as investors and traders are anticipating a widening of the interest rate differential between FX pairs.  The cost of one pound Sterling traded below 1.25 for the first time since last November.  Similarly, the Euro is closing the week at 1.065, again the cheapest since last November.

In addition to the disappointing inflation report, capital markets are closing the week based on threatening geopolitical news.  The price of West Texas intermediate crude oil is the highest it’s been in almost two years, driven higher by fears of a worsening conflict in the Middle East.  That will do little to put downward pressure on inflation in next month’s report.

Also making headlines this week was the sharp rally in the price of gold.  The commodity, which is widely considered an inflation hedge, has struggled to break above $2,100/ounce.  This week it did so with significant follow-through.  The precious metal is set to close the week at $2,350/ounce after trading as high as $2,450 earlier today, enjoying the same flight-to-quality that’s driving the price of oil higher.  Coincidently, the Wall Street Journal ran a story this week about how Costco began selling one ounce gold bars at retail location last year.  While we doubt that the sales are having much effect on the current rally, the news is likely a contributor to the price rise.

Next week the government will release data on retail sales and housing.  We’ll be watching to discern if the steady rise in interest rates since the beginning of the year has dented consumers’ ability and propensity to spend.