blockchainbasedgamingplatform| Starting tonight! The critical battle of the Federal Reserve's "first drop" is about to start

Golden ten data

Although many economists are optimistic that inflation will continue to slowBlockchainbasedgamingplatformBut no one underestimates the possibility of "accidents".

Three consecutive months of hot inflation data have undermined Wall Street's confidence that a series of interest rate cuts are about to beginBlockchainbasedgamingplatformThey now hope that there will be "good momentum" in the fourth CPI data this year.

Optimism about a soft landing for the US economy swept the market again in the days before the CPI report was released on Wednesday. Federal Reserve Chairman Colin Powell maintained hopes of cutting interest rates after the Fed's latest policy meeting. Subsequent data showed that pressure on employment and wage growth eased, helping to propel US stocks back to record highs.

Persistent inflation has been a major problem for investors in recent months. At the start of 2024, traders were betting that the Fed would cut interest rates more than six times this year, but when CPI continued to exceed expectations, they had to quickly scale back their bets and push US bond yields to their highest level since November.

Many investors say the April non-farm payrolls report allayed some of their concerns because a cooling labor market should eventually lead to slower price rises. Now, all they need is actual inflation data to support this view.

"the CPI report is likely to give a lot of impetus to the idea that the Fed will cut interest rates this year," said Gennadiy Goldberg, head of US interest rate strategy at TD Securities.

Is US debt better than US stocks?

There is a correlation between US stocks and US debt. Yields on Treasuries are largely influenced by investors' expectations of short-term interest rates set by the Fed, while share prices are partly affected by the risk-free return that investors can get from holding Treasuries to maturity.

The Dow Jones Industrial average is up 4% this month.Blockchainbasedgamingplatform.5%, less than 1% from the record set at the end of March. The rise in US bond prices pushed the yield on the 10-year Treasury note from 4. 4 per cent at the end of April.Blockchainbasedgamingplatform.7% dropped to around 4.5%.

Many investors believe that if inflation slows, US Treasuries will rise more than US stocks. Although the latter is close to an all-time high, the yield on 10-year Treasuries is still well above its level of less than 4 per cent at the start of the year.

Returns on US debt have been disappointing over the past few years because interest rates have risen higher than investors expected and stayed at that level for longer than expected. Still, investors are quick to buy Treasuries as soon as there are signs of slowing inflation, eager to lock in a yield of 4 per cent and 5 per cent before the Fed starts cutting interest rates.

Ed Perks, Franklin Income Investors's chief investment officer, said he expects yields on short-term Treasuries to fall by 0.2-0.25 percentage points and those on long-term bonds to fall by 0.1-0.2 percentage points if the data show a slowdown in inflation.

At the same time, he said it was "more challenging to see a sharp rise in the stock market" given current stock valuations. For the same reason, if inflation is higher than expected again, stocks may have more room to fall, he added.

"inflation will be a little tricky."

Us inflation has fallen sharply from its peak in 2022. The problem is that the Fed's preferred PCE price index has not yet returned to its 2 per cent target. Year-on-year growth in the core PCE price index fell from 4.9 per cent at the beginning of the year to 2.9 per cent at the end of last year. But it has been stagnant since then, at 2.8% in March.

The CPI report, released on Wednesday, will provide investors with a better than usual perspective on what the PCE price index will look like later this month. This is because the PCE Price Index includes a partial sub-item of CPI and PPI data.

Normally, CPI data are released before the PPI report, which gives investors some uncertainty about the Fed's preferred indicators. But this month's PPI data will be released on Tuesday, allowing investors to quickly calculate the likely growth rate of the PCE price index in April on Wednesday morning.

Many economists remain optimistic that inflation will fall again. They point out that commodity inflation has slowed to the level the Fed wants. Official housing inflation indicators have remained stubbornly high, but economists still expect them to moderate and be more in line with private sector measures of new rent increases.

Inflation in other types of services tends to slow both up and down. But recent reports show that the cooling of the labour market is a positive sign, as labour costs are often the main driver of price changes for such products.

In addition, economists point out that inflation in some types of services tends to lag behind inflation in related goods. As a result, many expect the rise in car insurance or maintenance costs to slow in the coming months, given what has happened to the prices of new and used cars.

At present, however, no one underestimates the possibility of an accident in inflation in any month. George Mateyo, Key Private Bank's chief investment officer, said it would still be wise to hold unconventional assets such as real estate, inflation-protected bonds or international equities as a hedge against overheated data, given that a poor economic report could hurt the U.S. stock and bond markets. He said:

"We think inflation is going to be a little tricky."

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