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+.16% Strikes Back

13 June 2024

by: EG Fisher, Partner and Chief Investment Officer, Mariner Investment Group, LLC

Wednesday was a big day for the markets this week. First, at 8:30 a.m. we got a game changing CPI report. Then, an FOMC meeting and Chairman Powell's press conference gave the market a framework for how the Fed will look at the data for the rest of the year and what actions they might take. It was yet another day of whiplash for investors trying to get a handle on inflation and the Fed’s evolving rate moves.

The CPI report surprised almost all market participants with Core CPI printing only +.16% month over month. This print was certainly lower than even the most aggressive estimates for a m/m change in Core pricing. And perhaps even more amazing was the -0.04% m/m for the Supercore (basically services ex-housing) print, the first negative print since September 2021. With three consecutive strong CPI reports earlier this year, the Fed had changed their framework from "ready to ease" to "higher for longer", until they gained more confidence in the trajectory of inflation being lower. Powell has repeatedly stated that one or two readings could have been a "bump", but that a third one was a problem. 

Following those reports, Fed officials admitted they would basically need three consecutive "good" CPI reports to begin the easing process. Well, they got their first this week. With the exception of the housing related components of Wednesday's reports, all other aspects and measurements were a big step in the right direction for the Fed. So with one report under their belts, and market-based expectations for the next two to be supportive as well, it seems a September ease is back on the table. The Fed will need to see those reports come in friendly, but if they do, it will open the door for the easing process to start.

We then had the FOMC statement and DOT plot at 2:00 p.m. and Powell's press conference at 2:30 p.m. These proved to be more hawkish than CPI. The Dot plot changed in three important metrics. First, the Fed's expectations for Core PCE for the remainder of 2024 increased by +0.2% from 2.6% to 2.8%. Thus admitting they will make less progress on the inflation fight this year than expected. This led to the second major change which was the 2024 Fed Funds Dot increasing from 4.625% at the end of the year to 5.125%! That’s 50 bps higher, implying only one 25 bps cut this year, as opposed to the three they expected in March. But the third major change was the addition of one 25 bp cut in 2025 (effectively pushing one cut from 2024 to 2025). The end result is higher for longer, and ultimately one less 25 bp interest rate cut. This can be seen in the "Long Run" Fed Funds Dot increasing 20 bps from 2.6% to 2.8%. That's right, a higher R Square rate, again. We believe these increases will continue to occur, but that's a discussion for another time.

Powell's presser was noteworthy in its confirmation that the Fed wants to see multiple constructive CPI reports (three we believe), better (lower) wage data, and balanced Labor market conditions to begin the easing cycle. We also received confirmation that on days where important data comes out in the middle of a FOMC meeting, Fed members can adjust their Dots mid-meeting, suggesting Wednesday's surprise CPI report was embedded in the FOMC Dot plot.  

All this leads to how important the next few employment reports and especially CPI (and PCE) reports will be for the market. A data dependent, active Fed keeps market participants uncertain of the timing of Fed actions as well as the extent to which the Fed will have to move rates. Be prepared for continued high volatility in the Fixed Income markets!

The information above reflects the professional views and opinions of its author and does not necessarily reflect the views or opinion of his employer Mariner more generally. This information is being provided for general consideration and interest purposes only and is not necessarily intended to induce consideration in the possible investment in any products or services offered by Mariner Investment Group, LLC, and should not be relied upon for any specific purpose.