Energy Musings - April 11, 2024

The latest inflation readings have come in hotter than anticipated. It has caused the outlook for multiple Federal Reserve interest rate cuts to decline. The possibility of no cuts in 2024 exists.

Six, Four, Three, Two, None?

Our title reflects how bets on the number of Federal Reserve interest rate reductions in 2024 have shrunk as inflation and labor market conditions failed to deliver the needed economic environment for lower inflation and interest rates.  The latest inflation reading sparked sharp market reactions – it was negative for stock and bond prices, but positive if you seek higher yields (income). 

The market chaos began last Friday with the March employment report showing nonfarm payrolls increased by 303,000, well beyond estimates for a 205,000 gain.  In contrast to prior months, there was a 22,000 combined increase in job gains for the two prior monthly reports.  It was the first economic report for March, and it was “hotter” than investors and economists expected. 

Yesterday, the March Consumer Price Index was released.  It was “hotter” than expected.  The overall CPI increased 0.4% for March, the same rate of increase as for the Core CPI, which excludes food and energy costs.  On a 12-month basis, the overall CPI was up 3.5%, more than February’s 3.2% increase.  The 12-month Core CPI increased 3.8%, a similar amount as in February. 

If you average the last three months, Core CPI increased 4.5%, the highest since last May.  It is a sign inflation is not going away – at least anytime soon.  That reality is contrary to proclamations by the media and bullish analysts and investors.  As an old boss of ours used to say, “Wishing and hoping is not a strategy.”  

March CPI showed overall inflation remains on a plateau with Core CPI higher.

President Joe Biden quickly claimed his administration was making good progress on cutting inflation.  He said he had cut inflation from “9% to close to 3%.”  However, he violated the standard mathematical formula for rounding numbers – five and above get rounded up, while four and below are rounded downward.