A future rate cut…and an American recession?

We know that the Fed primarily monitors PCE inflation, which is the measure it uses every quarter when it publishes its new estimates. And aside from that, there are no unpleasant surprises in the figures published in February: Core (“core”) PCE inflation continued to slow to 2.8%, the weakest increase since March 2021. However, we note that the monthly variation in PCE inflation was twice as large as the previous month (+0.4% vs +0.2% the previous month).

The following price index releases were slightly less favorable: Core CPI inflation, another measure of inflation in the United States, was still rising at an annual rate of 3.8%. It is certainly slightly better than the previous month (3.9%) but it is on the other hand higher than the consensus (3.7%) and similar to the observation for the monthly figure which came out at 0.4% against the consensus of 0.3. %

Finally, there is the producer price index. It’s not that the absolute level of its advance (+1.6% in annual data) is alarming… but it’s much higher than the consensus of 1.1% and almost double from the previous month (0.9%). And in the monthly variation (+0.6%), it is more than double the consensus and the previous month.

Why focus on this? Because producer prices that rise more strongly than expected could have an impact on the next PCE inflation figure, which is a reference to the Fed’s decisions on its rate policy.

Bond markets, once again, were not mistaken and the American 10-year rate rebounded to 4.30% on Thursday afternoon, producer price indices, up 12 basis points in a few hours and knowing that 5 days ago, this rate was close. From 4%. We’ve noticed an increase in volatility on the SP500, a sign that investors are wondering about the date of the Fed’s first rate cut.

There is one element that we think is important: For several weeks, American macro releases have been more regularly below the consensus than above, as evidenced by the downward shift in the Economic Surprise Index in The Atlantic. The latest example: retail sales, released Thursday afternoon, certainly showed progress, but weaker than expected.

This is reflected in the Atlanta Fed’s US growth expectations for the first quarter: While this forecast rose to over 4% in January, it now stands at 2.3%. This is certainly a fairly volatile forecast model, but compared to the more erratic macro releases of recent weeks we are not surprised by its trajectory.

And perhaps this is the situation that could force the stock markets to consolidate a bit: the first rate cut from the Fed that could happen only in the third quarter, if we believe the announcements of certain members of the Fed like Rafael Bostic. , and which will be a gap of a few months apart from the next one…but at the same time the economic dynamic will start to slow down (especially consumption).

A very gradual slowdown in price pressures for the Fed to trigger a dynamic series of rate cuts requires a somewhat sharper economic slowdown for underlying inflation to converge sustainably with the inflation target.

And that’s not necessarily a bad thing: indices like the Nasdaq100 have seen gains of more than 30% in less than 5 months, with the SP500 up 26%. The American stock market is still largely driven by the theme of tech and artificial intelligence, but that has completely obscured the sharp deterioration in rate cut expectations: at the end of December these expectations were for 6 rate cuts in 2024, not “more”. “3 drops now.

As long as inflation continues to slow and the economy is resilient, these downgrading expectations of rate cuts are not a problem for investors…but if the economy starts to weaken and the slowdown in inflation is not fast enough, this could create a problem. A temporary jaw effect for stock markets.

For its part, the ECB is slightly more certain than the Fed on the timing of the first rate cut and June appears to be slowly taking shape. But it’s not enough to read the situation as entirely “dovish”: Pressure on wages has eased slightly in recent months but is still rising above 4% and core inflation in the euro zone is still moving at 3.1%. This is obviously much better than the peak of 5.7% in 2023 but there is still a “last mile” to reach 2% and it will not necessarily be done in a straight line.