Instant View: U.S. Feb CPI increase leaves market guessing on Fed

NEW YORK (Reuters) – U.S. consumer prices increased in February amid sticky rental housing costs, but economists are divided on whether rising inflation will be enough to push the Federal Reserve to hike interest rates again next week after the failure of two regional banks.

The Consumer Price Index (CPI) rose 0.4% after accelerating 0.5% in January, the Labor Department said on Tuesday. That lowered the year-on-year increase in the CPI to 6.0% in February, the smallest annual gain since September 2021. The CPI rose 6.4% in the 12 months through January.

Core CPI without food and energy prices increased 0.5% after rising 0.4% in January. Year over year core CPI gained 5.5% vs 5.6% in January. Economists polled by Reuters had forecast monthly CPI and core CPI up 0.4%.

MARKET REACTION:

STOCKS: U.S. stock index futures extended gains and were last up 1.2%, pointing to a solid open on Wall Street BONDS: U.S. Treasury yields seesawed lightly, with the 2-year note last off at 4.234%, and the 10-year note a bit lower at 3.5676%FOREX: The euro ticked 0.1% higher against the U.S. dollar

COMMENTS:

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES LLC”This puts the Fed on hold because the numbers were not worse than expected. The fact that the core rate was actually kicked down a little bit is good news. So they’re going to have to respond to the banking crisis that’s probably just not over yet.”

“I don’t think the Fed will raise next week, if they do, it will only be by 25 basis points, but I think they will stay on hold.”

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY

    “It was pretty much as expected. We’re at a point of market anxiety where expected is good. The real fear at this point is for anything that is very exaggerated, as far as extremely high. The regional banks crisis has changed some of the focus… as to what options are available to fight inflation in the near term. It’s helpful to not feel pressure for a continued dramatic rate rise. That’s why the market is reacting positively.”

TIM GHRISKEY,  SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK

“It’s another piece to the puzzle. It is disappointing because we want to see that number come down because it means the Fed will be closer to stopping increases. We still have PPI tomorrow before the Fed meeting. But so much is really painted with what is happening to banks, which are all rallying today. So to us, the whole bank was really just a classic run on the bank, straight from ‘It’s a Wonderful Life.’ Somebody began to pull money out of SVB and others came in and it just spread to other banks, primarily banks with California exposure. Now that the Fed has said they are going to cover everybody at SVB, people just aren’t worried.

“There is a very high probability that in a couple of days we are back to normal and this whole run on the bank thing is history with the exception of the two that we have lost. So if we do see the banks rally between now and next Wednesday, we will see the Fed raise at least 25 basis points. It is pretty wild, the whole thing.”

ANGELO KOURKAFAS, INVESTMENT STRATEGIST, EDWARD JONES, ST. LOUIS

    “Friday the market was laser focused on inflation but clearly not any more. The pace of this inflation matters but now the Fed has to also consider the rising risks in financial stability. So policy makers will be attentive to those risks and likely pause sooner than they otherwise would’ve.”

    “Today’s readings are largely in line, with core inflation up slightly more than expected. Services inflation remains sticky. Today’s report suggests that the Fed has more work to do. It’s not dissimilar to January’s report. We continue to see inflation slow down but not at the pace we were hoping to see.”

    “About 70% of the monthly increase came from shelter. If we think about historical lags between when housing prices and new rents slow and when it shows up in CPI, we’d expect shelter inflation to start coming down by the summer hopefully. Historically its taken about a year. It’s been about 10 months we’ve seen house prices and new leases peak.”

    “It will be a balancing act for the Fed because we cannot look at this in isolation. At this point financial stability is probably as big a threat as inflation.”

JOSHUA CHASTANT, SENIOR INVESTMENT ANALYST, GUIDESTONE FUNDS

“The CPI did come in a little bit hotter month over month on core. But the CPI is kind of deemphasized from how laser focused everyone has been on it over the last year or so. The Fed hikes rates until something breaks and clearly, we’re seeing some stresses in the banking sector.”

“The Fed is sort of stuck in between a rock and hard place, having to be accommodating because of the condition of financial markets versus the inflation. If investors believe that the Fed is going to stop here and that inflation will take a back burner to financial stability, the S&P can rally, particularly the bank sector.”

“We’ve seen a lot of capital move from the regional banks into the larger, globally and systemically important banks over the last day or so. If the regional banking system starts to see stresses, the Fed will have a hard time continuing to raise rates.”

NANCY DAVIS, FOUNDER, QUADRATIC CAPITAL MANAGEMENT, GREENWICH (emailed)

“Tuesday’s Consumer Price Index continues to show elevated inflation, which is counter to the narrative that the Fed had essentially won the inflation battle. Jerome Powell has frequently used the term disinflation so far this year and Tuesday’s report is anything but disinflationary. Disinflation may be the new transitory, as the Federal Reserve was also incorrect in 2021 when it frequently referred to inflation as transitory.”

“We are in a situation where inflation is still high and the economy is at risk for further weakening, particularly amid the recent bank failures. This combination is consistent with stagflation, which is when the economy weakens during a time of elevated inflation.”

“Even though realized inflation remains near 6%, future inflation expectations are much lower. Right now, the market is fully pricing in that the Fed will be able to contain inflation, with the 5y-5y CPI inflation breakeven currently trading at 2.19%, a touch above the Fed’s 2% inflation target. Investors who believe inflation will not drop quickly may see this as a good time to add inflation linked assets to their portfolios. What if inflation is more persistent than the market expects?”

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH

    “In light of the weekend’s events, I don’t think it could have been a more perfect number.”

    “It’s showing that inflation is trending the way that the Fed has kind of expected and wanted.”

“If it were a hot number, that would have probably driven the markets lower … but this number kind of shows that the lagging effects of raising interest rates are working.”

    “For investors that are investing for longer than 15 minutes, it doesn’t really matter. The Fed’s not going to be super aggressive and hurt banks more by raising interest rates.”

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT 

“Both the headline and core CPI number probably continue along with the thinking that the Fed is likely going to be either pausing or at the very least raising by only 25 basis points at the next meeting.”

“If the Fed’s more concerned about credibility, then they’re going to have to raise by at least 25 basis points. But I think the credibility concern is probably secondary to the concerns about the overall market.”

“I think they’re going to probably be on hold because they’re worried about the issue of contagion and the precarious position that it puts the banks in with regards to their balance sheets. If the Fed’s worried about saving face or coming off as wishy washy or worried about losing credibility with the market, they’re going to raise by 25 basis points. I think that’s what they should do, but they probably won’t.”

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