The April CPI report is set to show that inflation has already peaked

Shoppers at a grocery store in San Francisco, California, U.S., on Monday May 2, 2022.

David Paul Morris | Bloomberg | Getty Images

April’s CPI report is expected to show that inflation has already peaked – a development some investors say could calm markets temporarily.

But economists say that even if headline inflation were to be delayed, core inflation could rise on a monthly basis and remain elevated for months to come. Core inflation excludes food and energy costs.

According to Dow Jones, the CPI report is expected to show headline inflation rising 0.2% in April, or 8.1% yoy. That compares to a whopping 1.2% gain in March, or an 8.5% year-over-year gain. April data is expected Wednesday at 8:30 am ET.

Core CPI is expected to rise 0.4% or 6% year over year. This compares to 0.3% in March, or 6.5% on an annualized basis.

Stocks turned Tuesday ahead of much-anticipated data. The S&P 500 ended the day up 0.25% and the Nasdaq gained 0.98%. The Dow Jones Industrial Average lost 84.96 points.

The closely-watched benchmark 10-year Treasury yield slipped to about 2.99% on Tuesday after rising sharply to 3.20% on Monday. Bond yields – which move inversely to price – have risen rapidly on expectations of aggressive US Federal Reserve rate hikes.

“I wouldn’t say that tomorrow’s CPI in itself matters. I think the combination of March, tomorrow and May data is going to be the big turning point in a way,” said Ben Jeffery, fixed income strategist at BMO.

But Jeffery said the report has a good chance of moving the market no matter what.

“I think it will either reignite the selling pressure that we saw that took 10 seconds to 3.20%… .

A possible turning point for stocks

In the stock market, some investors say the data could signal a turning point if April inflation comes in as expected or even weakens.

“I think from a technical perspective the market is very focused on guessing how much the Fed is going to move,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.

A hotter report would be negative as it could mean the Fed will take an even tougher stance on interest rates. Last week, Fed Chair Jerome Powell signaled that the central bank could hike rates by 50 basis points, or half a percent, at each of the next few meetings.

The market was nervous about inflation and that the Fed’s response could trigger a recession.

“I don’t think this is the end of the fall in the market… The market needs to fall at least 20%. If we get a better set of inflation data, 20% could be the bottom,” Roth said. The S&P 500 is nearly 17% off its high.

“If the inflation data isn’t as good as we think it is, not just this month but consecutive months, then I think market prices are indicative of a recession, and then they’re down 25% to 40%,” said Roth.

Two risks arise

Roth said there are two potential exogenous risks in the inflation data and both could prove to be a problem for markets. One is the unknowns surrounding the oil and gas supply shortages and price shocks caused by Russia’s invasion of Ukraine, and the other is China’s recent Covid-related shutdowns and the impact on supply chains.

“Nobody knows how they’re going to play out…Both of which could pose a bigger problem than the market is currently anticipating,” Roth said.

Aneta Markowska, chief financial economist at Jefferies, said she expects a hotter-than-consensus report, with headline CPI up 0.3% and core reading up 0.5%. She thinks the market’s focus is wrong and investors should be more concerned about how much inflation can fall.

“I think a lot of people are focused on the rate decelerating year-on-year, and I think that’s helping consumers because it looks like real wages are actually going to be positive for a change in April on a monthly basis,” she said . “But if we get that core acceleration back to 0.5% that we’re forecasting, that’s a problem for the Fed. If you extrapolate that on an annual basis, you’re running at 6% and that really wouldn’t mean a slowdown.”

Markowska noted that the central bank expects inflation to slow to 4% this year and 2.5% next year. “The question we need to ask is whether we are on track to meet that guidance, and if not, the Fed could have a bigger policy overshoot than it envisioned,” she said.

The perception is that inflation issues are being driven by the supply chain, but those issues are disappearing, Markowska added.

“I think this ship has sailed. We are past supply chains. This is the service sector. This is the job market,” she said. “Just because we’ve peaked and core inflation is going down doesn’t solve the problem. The problem is everywhere now. It’s in services. It’s in the labor market and it’s not going away on its own… We need core inflation to come down to 0.2%, 0.3%m/m and we need it to stay there for a while.”

US Barclays economist Pooja Sriram said she doesn’t think investors should get too excited about inflation peaking as it matters how quickly the level falls.

“In order for the Fed to be pacified that inflation is coming down, we need to get really weak core CPI print,” she said. “The headline CPI will be difficult to come down as the energy component fluctuates.”

The energy index rose 11% in March and could contribute less to headline inflation in April as gasoline prices fell. Economists say energy will be a bigger issue in the May data as gasoline returns to record levels.

Some economists expect used car prices to fall in April, but Markowska said the data she is monitoring shows an increase at the retail level. The April CPI report is set to show that inflation has already peaked

Jane Marczewski

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