US Inflation Eases, Interest Cut Looms, What To Buy !
On Wed, 11 Sep 2024, US Bureau of Labor Statistics (BLS) reported US inflation report - the Consumer Price Index (CPI) for August 2024.
As expected, prices increased in August 2024, while the annual inflation rate declined to its lowest level since February 2021.
This sets the stage for an expected -0.25% interest rate cut from US central bank in a week’s time.
The consumer price index (CPI) is a broad measure of goods and services costs across US economy.
CPI - YoY changes
Headline Inflation. (see above)
CPI (MoM) was 0.2%, inline with forecast and unchanged from July’s CPI (MoM).
CPI (YoY) was 2.5%, inline with forecast and -0.4% lower than July’s CPI of 2.9%.
CPI - MoM changes
Core Inflation (see above).
However, US core inflation report painted a slightly different picture:
Core CPI (MoM) was 0.3%. It was +0.1% higher than analysts’ estimates (0.2%) and July’s core inflation (0.2%). (see below)
Core CPI (YoY) was 3.2%. It’s same as analysts’ estimates and unchanged from July’s core inflation. (see above)
Latest data showed that:
US inflation is moderating slowly, with housing-related costs still an issue - coming in stronger than expected. (see above)
The culprit was owners' equivalent rent (OER) that was up 0.5% in August, higher than July's 0.4% rise. OER is the estimated rent a homeowner would pay if they were renting their own property.
CPI’s housing component has a 42% weighting in the index.
The shelter index was up 5.2% YoY.
Food prices rose negligibly by 0.1%, while energy costs dipped by -0.8%.
Used vehicle prices decreased 1%, medical care services declined 0.1% and apparel prices increased 0.3%.
Market Reaction.
US stocks managed to reverse early losses (from 11am onwards) to close higher on Wed, 11 Sep 2024. (see above)
This was after investors have digested the inflation data that showed consumer price increases have ticked lower in August.
By the time market called it a day: (see above)
DJIA : +0.61% (+124.75 TO 40,861.71).
S&P 500 : +1.07% (+58.51 TO 5,554.13).
Nasdaq : +2.17% (+369.65 to 17,395.53).
Many attributed Nasdaq’s “recovery” to semiconductor leader $NVIDIA Corp(NVDA)$ for pulling the index higher as CEO Jensen Huang spoke at a $Goldman Sachs(GS)$ conference.
Will the magic run continue into today and tomorrow - it’s still anyone’s guess.
Looming Interest Cut.
With inflation data out, focus has returned to the burning question of what will be the interest rate cut when Fed chairman Mr Jerome Powell take to Wednesday press conference on 18 Sep 2024 afternoon ?
Judging by the latest CME FedWatch tool recalibrated immediately after the inflation data was out: (see below)
Traders have priced in an 85% chance that the FOMC will approve a -0.25% or 25 basis point, interest rate reduction.
The prospect of a -0.50% interest cut has tapered to 15% from a 25% (09 Sep 2024 sampling).
My viewpoint: (mine only)
When inflation data was out, I was relief to find that US economy was cooling further, slowly but surely.
However, US market’s initial negative sentiments was puzzling, I could not figure out why the anticipated “celebration” did not take place.
Thankfully, it did return about an hour and a half into trading and ending the day on a “higher” note than it had begun with.
Thought on Interest rate cut:
There is a need to “understand” the overall dynamics of the current FOMC team & its members.
Basically, they are a rather conservative group of central bankers.
Slow to react (to raise interest rate) when inflation has already crept into the US economy in full sight (glaringly).
Why would it be any different (now) even when inflation is dipping and affecting the labour market (glaringly, all over again)?
To be honest, I rather the Fed takes a delay approach when cutting the Fed funds rate.
This is because, it is undesirable when a stock market has to put up with high volatility that a “-0.25%” interest cut” would cause in short-term funding markets.
Whatmore, the FOMC team still have 2 meetings more (in November & December) before 2024 is over.
So, plenty of opportunities to further trim the Fed funds rate if so desire.
Why the “rush” - right ?
What To Invest - Planning?
Now that it is quite certain that interest rate is set to fall, perhaps it is time too to strategize and plan which sectors stock to invest.
Above are the different sectors’ ETFs performances on 11 Sep 2024 when US market staged a “recovery” of sort after the CPI reports were out.
If I have to pick 3 sectors, it would be:
Technology sector. Stock - $Apple(AAPL)$. ETF - $Technology Select Sector SPDR Fund(XLK)$.
Consumer discretionary sector. Stock - $Amazon.com(AMZN)$. ETF - $Consumer Discretionary Select Sector SPDR Fund(XLY)$
Real estate sector. The fact that “housing component” rose for August inflation is an indication of its potentials ? ETF - $Real Estate Select Sector SPDR Fund(XLRE)$ .
Textbook economics states that a falling interest rate will increase the propensity of a rational consumer spending “more” money instead of “saving”.
With the new iPhone 16 available for purchase at Apple stores from 20 Sep 2024 onwards, will it result in a stampede like in the past ?
It is never too early to start planning and buying, if the price is right - right ?
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Do you think the Fed should cut interest rate by “-0.25%” or “-0.5%”?
Do you think it is better to “proceed” with a smaller initial interest cut, observe market reactions, pour over economic reports before announcing the next interest cut on 07 Nov 2024 and 18 Dec 2024 (if any)?
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