Fed’s favourite inflation indicates worry

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Inflation remains a hot topic among investors even as the earning seasons push it to the background as concerns about earnings recession take root. There’s no magic to the figures: recent data points to a decelerating economy, reflected by a weaker than expected GDP data. While this would cheer the market since the Fed aims to reduce inflation through wreaking economic data, the recent Core Personal Consumption Expenditure (PCE) index still shows signs of sticker inflation.

Core PCE data is elevated.

The core CPI that excludes volatile components such as food and energy jumped by 4.6% compared to a year ago. This is higher than most economists’ estimate of 4.5%. It is well above the Fed’s target of 2%.

Hence, there is still a pretty long road in the inflation fight.

The Employment Cost Index showed resilience.

The index measures the compensations received by US workers. We have seen a rise of 1.2% for the first quarter despite an expectation of 1.1%. Yearly, the figure is less rosy. We saw an annual increase in compensation of 4.8%, higher than the forecast of 4.6%.

This is concerning because, wage-induced inflation has been the main culprit, and any report on wage rise is detrimental.

Next Week FOMC – Rate hike is still expected

Friday’s core PCE gave the Fed a final push and reason to maintain its rate-hike campaign. There is a consensus among the investment community to predict a pause in future FOMC meetings after the 3 May rate hike.

Nonetheless, we believe that even maintaining rate hike at a high level is considered an aggressive monetary tightening effect on the economy. We expect this to become a strong drag on GDP as investors start to realise the wrath of the lag effect of the interest rate hike that is set to dampen growth and corporate earnings.

The stock market has remained vibrant as VIX and Treasury Yields fall. How long it lasts, is a guess of tomorrow’s fortune.

And here comes the month of May, where the old adage of “Sell in May” rings.

Do we answer the chorus? Let’s thread the water ripple.

See you next week, friends!