Global X ETF Model Portfolio TeamToday’s CPI data came in a bit hotter than expected, but at least the headline figure continued its trend lower. However, inflation is proving stickier than the Federal Reserve (Fed) would like, especially in areas like shelter, medical care, and motor vehicle insurance. While inflation has cooled from its peak, it’s not cooling fast enough, and that’s the key issue here. We believe September’s strong jobs report followed by the hotter than expected CPI print reduces the probability of another 50-basis point (bps) rate cuts this year. Our base case remains at least one more 25 bp cut in 2024.
Core CPI, which strips out volatile food and energy prices, has risen steadily since a low of 0.1% m/m in June. Coming in at 0.3% m/m this pushed the y/y core CPI reading to 3.3%, above last month reading of 3.2% y/y and ahead of market expectations. The uptick in core and supercore inflation keeps the focus on inflation’s trend towards the Fed’s target. While the summer’s narrative shifted the focus to economic growth, we believe the strong jobs number combined with this CPI reading increases the balance of priorities between price stability and full employment.
So, what does this mean for the Fed? In our view, this makes it less likely the Fed will introduce another round of jumbo cuts anytime soon. The Fed has been clear—they’re not backing down until inflation is well under control, and this report just reinforces that. Higher inflation means the Fed is likely to be cautious and remain data dependent in their easing cycle.
But what does this mean for portfolio positioning? We continue to believe that equities are better positioning than fixed income given the underlying strength in the economic data. A slower rate cutting cycle with reasonable fundamentals is a decent situation for equities. However, fixed income markets may find less to cheer about as interest rate expectations are recalibrated.
That said, if inflation trends downward in the coming months, the conversation could shift again. A meaningful drop in inflation would give the Fed more breathing room to consider a fast pace of cuts. But for now, today’s CPI data keeps the magnitude of rate cuts in limbo, and the market will have to adjust to the reality that the Fed isn’t rushing to ease policy rates.