U.S. stocks are trading modestly higher on the day despite a pre-market rally that saw S&P 500 futures post fresh 8-week highs on the back of the softer-than-expected inflation data for March.
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The latest Labor Department data showed that inflation cooled in March with the consumer price index (CPI) climbing 0.1% and 5.0% month-over-month (MoM) and year-over-year (YoY), respectively.
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The core inflation, which excludes food and energy, rose by 0.4% and 5.6% MoM and YoY, respectively. As expected, the falling energy costs dragged the headline inflation figures lower. Used vehicle prices were also trending lower, the data showed.
“As the economy slows, consumer prices will decelerate further and should bring inflation closer to the Fed’s long-run target of 2%,” Jeffrey Roach, chief U.S. economist at LPL Financial told CNBC.
“Markets will likely react favorably to this report as investors gain more confidence that the next Fed meeting may be the last meeting when the Committee raises the fed funds target rate.”
The initial market reaction was as expected given the softer-than-expected CPI report with bond yields and dollar lower while stocks gained. However, stocks have since moved lower to erase much of the earlier gains with the S&P 500 trading ~0.3% in the green at 14:15 GMT.
The fact that inflation is falling could convince the Fed to adopt a “wait-and-see approach” at its highly-anticipated May meeting, which would practically end the ongoing tightening cycle. The situation surrounding Fed’s next actions could be cleared later today when the FOMC minutes are published.
However, the YoY pace of core inflation rising MoM for the first time since Sept 2022 could mean that the Fed will still deliver a 25-bps rate hike in May.
Following the last week’s jobs report and today’s CPI data, the focus now shifts to the Q1 earnings season. According to FactSet, the estimated earnings decline for the S&P 500 is -6.8%, which would mark the largest earnings decline reported by the index since Q2 2020.
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