- Investors are gearing up for inflation figures from the US.
- Forecasts show annual inflation rose from 3.2% to 3.4% in March.
- US earnings expectations have dropped by 2.2% since the quarter began.
Equities closed Monday nearly flat with no catalysts ahead of the crucial US Consumer Price Index report. At the same time, a sharp increase in Treasury yields due to a drop in Fed rate-cut expectations put pressure on stocks.
Investors are gearing up for inflation figures from the US that will shape the outlook for rate cuts. The CPI report causes a lot of volatility in the market as it shows whether higher interest rates are having the intended effect. However, recent data from the US has shown a mixed picture that has confused most investors. While the economy has shown pockets of weakness, it remains robust. High economic demand could contribute to higher prices, pausing the progress made so far to lower inflation.
Moreover, investors have been concerned about rising commodity prices, especially oil. The ongoing geopolitical tension has contributed to an increase in fuel prices. This could spark another round of inflation that would dim expectations for interest rate cuts.
US inflation (Source: Bureau of Labor Statistics, Bloomberg)
Forecasts show annual inflation rose from 3.2% to 3.4% in March. Meanwhile, economists expect a decline in the monthly figure from 0.4% to 0.3%. The actual figure might miss or beat the forecasts. A miss would be bullish for the equities market as it would increase rate-cut expectations. On the other hand, if the actual figure beats forecasts, the likelihood of a Fed cut in June could fall well below 50%. At the moment, there is a 54.5% chance that the first cut will come in June.
Meanwhile, Treasury yields have rallied to new highs due to declining rate cut expectations. The last major report from the US was the March jobs figures. Employment beat forecasts by a significant margin, while the unemployment rate unexpectedly declined.
Despite higher interest rates, the labor market has remained resilient. Consequently, there is doubt in the market whether the Fed will implement the first cut in June. The longer the Fed keeps borrowing costs high, the more negative the impact on businesses will be. As a result, equity markets suffer. Investors await more clarity on the rate cut outlook when the inflation report comes out.
At the same time, market participants are preparing for the first quarter earnings season. Notably, earnings expectations have dropped by 2.2% since the quarter began.
