Unruly inflation did not deter her. The friendly FED was enough to keep him afloat. and the good ones balances gave him wings. It is, in short, a cornice rally.
Wall Street fell 5% in April, but there was no Sell in May. Quite the opposite. The stumble was not a fall but a spring. Fast and powerful. The correction aborted. The stock market launched a counterattack. And, through its main indices, it added a new crop of brand-new records. He scaled, as the saying goes, a wall of worries. Unruly inflation did not deter her. Nor the corollary of it, the promise of a rate cut that is extended. From March to June and now to September. And so it will be until the rebellion is canceled. Or the economy falters and requires first aid. May was the same party, with no other alibi than the patience it requires. Jerome Powell to the four winds. The friendly FED was enough to keep him afloat. And her good balance gave her wings. The S&P 500 and the Nasdaq had their best May in the last 21 years. The Dow Jones Industrial, since 2020.
It has already been said: there are problems. April inflation brought the best reading of the year, which was not good. First, consumer prices and, on Friday, the personal consumption deflator certified a very slight moderation. The core measurement of the deflator rose 0.2%. It was coming off two previous records of 0.3% after a 0.5% jump in January. The relief for the markets was great. The real difference, millimeter. From a variation of 0.255% in March it went to 0.24917% in April. The improvement that shines in the headlines is essentially a rounding off.
In a panoramic view, The decline in inflation stagnated. At the end of December, year-on-year inflation was 2.6% (and the core definition, 2.9%). In April the general measure rose one tenth and the core fell one tenth. That is, 2.7% and 2.8%, respectively. What is the problem? The dynamics in real time, month by month, which those photos, by the way, do not capture. Not only is there no progress, but a resurrection of the upward trend. 2023 was the best of all worlds. The core deflator – if its annualized quarterly change is taken – exactly met the target of 2% in the last two quarters of the year. And at what speed is it currently traveling? It accelerated to 3.5%. Annualized April gives 3.43%. That is, if you want to see it that way, the slight improvement.
Wall Street pondered other progress at the same time. Together with the deflator, the April consumer spending. And he was glad that he calmed down. From growing 0.7% in current dollars in February and March, the change dropped to 0.2%. It is a real drop of 0.1%. That spending calms down is part of the recipe that the FED pursues to put inflation in the box. The stock market resumed its rise and gave that sign of cooling a warm welcome. After all, data moderation twice is a vote in favor of the strategy of watching and waiting, and not losing patience, which Powell promotes with more conviction than many of his colleagues. That the economy slowed down in March and April was known, and is confirmed. The novelty is another. Activity picked up again in May, according to fresh information from the PMI report. It was already told here last week. He did it at his most intense pace in two years.
The attitude of the FED: patient and alert
It is worth listening to the words of Lorie Loganfrom the Dallas FED. “Monetary policy may not be as restrictive as we thought”. It is necessary, therefore, “keep all options on the table”. Complete Neel Kashkarifrom the Minneapolis FED: “I want to see many months of favorable inflation numbers before a rate cut.” But, if the data surprises, “we will know what to do.” In that sense, “more rate increases” will be on the table. It’s a threat? No. Just an informative footnote. The main message is that the FED waits with patience and does not despair. Very attentive, the aforementioned Logan, for example, fears that an energy price shock could occur and undock inflationary expectations. It didn’t happen in May. The barrel of Brent crude oil plummeted 7%. But let us be warned of a patient and alert FED.
Will Wall Street be able to withdraw and continue the good streak in June? You will need Powell as an antidote to high-voltage indicators. And that the buyers’ strike that occurred in the middle of the week at the Treasury bond auctions does not emerge with new demonstrations. It will not be difficult for you to ignore the avatars of donald trump in Justice. And be inspired by the rate cuts promised by the ECB and perhaps also the Bank of Canada. A day later, the US employment report could well increase the aid (the labor market does seem to be tempering). Ultimately, it is about a cornice rally. The abyss that was glimpsed in April remains on the side of the road. Going up and driving without accidents also requires maintaining very low volatility to avoid skidding and leaving the pavement.
Source: Ambito
