Markets hesitate as Fed's favored inflation gauge slows

Dow slid back 17 after opening higher, advancers ahead of decliners 2-1 & NAZ went up 56.  The MLP index was up 1+ to the 273s & the REIT index added 1+ to 370.  Junk bond funds inched higher & Treasuries were purchased which lowered yields (more below).  Oil was lower in the 77s & gold fell 8 to 2358.

Dow Jones Industrials 

Inflation rose about as expected in Apr, with markets on edge over when interest rates might start coming down, according to a measure that is followed closely by the Federal Reserve.  The personal consumption expenditures price index (PCE) excluding food & energy costs increased just 0.2% for the period, in line with the estimate, the Commerce Dept reported.  On an annual basis, core PCE was up 2.8%, or 0.1 percentage point higher than the estimate.  Including the volatile food & energy category, PCE inflation was at 2.7% on an annual basis & 0.3% from a month ago.  Those numbers were in line with forecasts.  Fed officials prefer the PCE reading over the more closely followed consumer price index, which the Labor Dept compiles.  The measure accounts for changes in consumer behavior such as substituting less expensive items for costlier alternatives & has a wider scope than the CPI.  Since then, there has been some evidence that inflation is starting to ease again, albeit slowly.  The Apr consumer price index showed that inflation had cooled slightly to 3.4%, down from 3.5% the previous month, alleviating investor concerns that prices were heating up again.  A 1.2% rise in energy prices helped push up the headline increase.  Food prices posted a 0.2% decline on the month.  Goods prices rose 0.2% while services saw a 0.3% increase, continuing a normalization trend for an economy in which services & consumption provide much of the fuel.  Personal income increased 0.3% on the month, matching the estimate, while spending rose just 0.2%, below the 0.4% estimate & off Mar's downwardly revised 0.7%.  Adjusted for inflation, the spending numbers showed a 0.1% decline, due in large part to a 0.4% decrease in spending on goods & just a 0.1% rise in services expenditures.

The Fed’s preferred inflation measure rose 0.2% in April, as expected

Atlanta Federal Reserve Pres Raphael Bostic said that central bankers are unlikely to deliver an interest rate cut in Jul amid signs that inflation progress has slowed.  Asked whether there is a scenario in which the Fed would start to ease rates in Jul, Bostic said,  "I'm keeping my eyes on the short-run trajectory, and if we can continue to see that trajectory move forward, I think we will be in a good place. I don't think that's going to be in July."  He added that he is looking for economic data that shows the economy is "sufficiently strong" & inflation has moved closer to the Fed's 2% target before supporting any rate reductions, but he noted, "That's not my outlook today."  Still, Bostic, who is a voting member of the 12-person Federal Open Market Committee this year. said he would not wait until inflation falls to 2% in order to start loosening monetary policy.  "That would really cause inflation to overshoot, and that wouldn't be ideal," he added.  Bostic anticipates that inflation will come down "very slowly" over the course of the year & eventually settle around 2% in 2025 or even later.  Bostic said that he does not expect to raise rates again this year unless there is evidence that price pressures are heating up again within the economy.  "I've been on the record for more than a year now saying, 'I don't think that's going to be required for us to get to our 2% target,'" he continued.  "I still believe that today.  But if it were the case that inflation moved in the other direction, and we started to see some reacceleration in pricing power, I'd have to take on board the likelihood that a rate increase is appropriate. But I don't see that happening today."

Fed's Bostic signals central bank unlikely to cut interest rates in July

Treasury yields were slightly lower after the Federal Reserve's preferred inflation data (PCE) came in mostly in line with expectations.  The benchmark 10-year Treasury yield fell more than 3 basis points to 4.518% & the 2-year Treasury yield was down more than 1 basis point to 4.912%.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  The PCE release comes after another key inflation measure, the consumer price index, came in at 3.4% for Apr on an annual basis.  Core CPI increased 3.6% on a 12-month basis.  Inflation has proven stickier than previously thought this year, pushing back expectations for when interest rates may be cut. CME Group's FedWatch tool last showed that traders were not pricing in rate cuts for the Fed's Jun or Jul meetings & chances of a cut in Sep were at around 50%.  The next Fed policy meeting is scheduled for Jun 11-12.  Fed officials have repeatedly indicated that they are looking for more data evidence that inflation is easing before moving to cut rates & that patience would be required.

Treasury yields dip after inflation data roughly matches expectations

Inflation data continues to be more of the same, fairly good but no quite good enough to take Treasury rates lower.  This scenario could last for the rest of the year.  Investors used to much lower rates may get impatient while they wait for the Fed to cut rates.