Inflation Fears Grow. Will It Last?

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Investors have become increasingly nervous about the potential for higher interest rates but there is reason to hope lower inflation is also possible.  S&P purchasing managers data suggested to some an increased likelihood of higher rates while energy prices and housing data suggest lower rates may lie ahead.

The coming weeks data will give the Federal Reserve (Fed) more data-based information from which to make its decision on June 12. The data starts this week with revised first quarter Gross Domestic Product (GDP) showing growth slowing to 1.3 percent from the 1.6 percent pace revealed in the April 25 Advance GDP report.

Personal Consumption Expenditures data (PCE), a focus of the Federal Reserve, is expected to show Core PCE unchanged at a 2.8 percent annual pace. In the monthly data, Personal Consumption expenditures are expected to fall to 0.3 percent from an upside surprise of 0.8 percent last month which would indicate slower consumer spending.

Inflation Fears Rise…

Bond yields rose last week after the release of the S&P Global Flash U.S. Composite Purchasing Managers Index showed the US PMI Output Index at a 25-month high and the U.S. Services Business Activity Index at a 12-month high.

“Not only has output risen in response to renewed order book growth, but business confidence has lifted higher to signal brighter prospects for the year ahead” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. He also noted that “costs have increased on the back of further wage growth and rising fuel prices, pushing overall selling price inflation for goods and services up to its highest for nearly a year.”

CME’s FedWatch tool showing potential interest rates after the July 31 meeting.

The CME FedWatch Tool indicates there is currently an 85 percent chance of rates remaining unchanged at the July 2024 FOMC meeting and a 13 percent chance of a rate ease with just a 1 percent chance of a rate hike.

Energy Crumbles

Crude oil is defining a range roughly between $76 and the $81 per barrel since May 2 and the second and third largest oil companies by market cap – Exxon Mobil (XOM) and Chevron (CVX) – have fallen below, and remained below, their 50-day moving averages for the past week.

Global events – Ukraine, Russia, OPEC, and an unstable situation in the Middle East – add volatility to the price action. “Kyiv has ramped up its attacks on Russian oil refineries since the start of the year, kick-starting a campaign to hamper gasoline production, which fuels President Vladimir Putin’s war economy”, according to Newsweek. The upcoming OPEC meeting may impact oil prices as may the Israeli/Palestinian conflict and tensions in the Middle East.

Crude oil (@CL) futures, daily chart, with select indicators and events.

The daily crude oil futures chart shows a moving average cross above closing price in April and the sell-off extending to the 50 percent retracement of the December to April rally, followed a jump from support at the 50 percent retracement of the December 2023 to April 2024 rally down at $76.52.

Housing Market

“Home prices reaching a record high for the month of April is very good news for homeowners, however, the pace of price increases should taper off since more housing inventory is becoming available” said Lawrence Yun, Chief Economist at the the National Association of Realtors (NAR). The April Existing Home Sales report noted housing inventory was up 9 percent month-on-month with 1.2 million homes for sale. Year on year, inventory was up 16 percent. NAR also noted higher prices amid slower sales of existing homes.

“Right now the inventory sitting on the market – 34 percent of it has a price drops which is more than in the past 10 years” said Compass (COMP) CEO Robert Reffin. He also noted “buyers pushing back and record price drops” with “16 percent more inventory on the market and 40 percent more inventory over the million dollar range”.

Zillow’s April Rental Market report notes that “rents have grown 1.5 times faster than wages since 2019” and that the slow but steady rent climb has continued in 2024. The price of shelter is 36 percent of CPI as the Fed has repeatedly said, suggesting a reduction in rent prices will help curb inflation.

Upcoming Catalysts

Here are some upcoming events that could impact interest rates and inflation expectations in the coming days and weeks.

  • Friday May 31 – Personal Consumption Expenditure (PCE) – the Fed’s favored inflation gauge.
  • June 2 – Non-Farm Payrolls
  • June 12 – Consumer Price Index (CPI) where shelter prices will be a major focus
  • June 12 – End of two-day Fed meeting – Rate decision and updated Dot Plot

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Mary Slack is a Content Specialist at TradeStation Group. Drawing on over two decades of experience as an analyst, trader and journalist, her background includes equities, futures, FX, fixed income, and derivative markets. She previously worked at MCM, GFI and Thomson/Reuters working on financial products for FX and fixed income. She previously traded on the floor of the Chicago Board of trade in the bond options pit and has experience as a hedge fund trader focused on the financial sector. She was the bureau chief of an economic news agency based in Washington, D.C. that focused on economic data and market economics. She brings extensive options trading and analysis experience. Customers can expect her to write about stocks and stock options for TradeStation.