February CPI Release Before March FOMC
PPI and Retail Sales Announced on the 14th
With the Federal Open Market Committee (FOMC) meeting scheduled for the 19th-20th, market attention is focused on the February inflation and retail sales data to be released this week. If the consumer price index (CPI) comes out higher than market expectations again, repeating the 'January shock,' the timing of interest rate cuts could be delayed, prompting investors to closely watch the February CPI announcement.
According to the U.S. Department of Labor on the 10th (local time), the February CPI will be released on the 12th.
Financial information firm FactSet expects the February CPI to rise 0.4% month-over-month, an increase from January's 0.3%. Year-over-year, it is forecasted to remain steady at 3.1%, the same level as the previous month. The rise in gasoline prices is expected to contribute to a larger month-over-month inflation increase compared to January.
While the headline CPI is expected to rise month-over-month, the core CPI, which excludes the volatile food and energy sectors, is anticipated to show a slowdown in its upward trend. The February core CPI is projected to increase 0.3% month-over-month and 3.7% year-over-year, both lower than January's 0.4% and 3.9%, respectively. If the annual core CPI aligns with market expectations, it will mark the lowest level in two years and ten months since April 2021.
However, the expected increase in the high 3% range still significantly exceeds the central bank's target of 2%. As the Fed has emphasized multiple times, additional evidence of inflation slowing down is necessary before considering interest rate cuts.
The February Producer Price Index (PPI) will also be released on the 14th. The PPI is expected to rise 0.3% month-over-month and 1.1% year-over-year. Retail sales data for February, released on the same day, will also draw attention. Following a 0.8% month-over-month decline in January retail sales, February retail sales are expected to have increased by 0.8%.
Investors are cautious, waiting for the data release to see if the inflation shock will repeat in February as it did in January. If the February CPI and PPI inflation rates come out higher than expected, it could dampen hopes for interest rate cuts. This inflation data is particularly significant as it is the last major indicator before the FOMC meeting on the 19th-20th, attracting strong market interest. Investors are likely to look for hints about the personal consumption expenditures (PCE) inflation trend, which will be announced on the 29th, through the CPI data.
Experts believe the February CPI will not provide clear clues about the future interest rate path. Wells Fargo analyzed, "It is highly likely that the core CPI inflation rate will record a recent three-month annualized rate of 3.9% through February," adding, "The Fed will continue to work longer to gain confidence that inflation will consistently return to its target."
Anna Wong, an economist at Bloomberg Economics (BE), Bloomberg's economic research institute, said, "The February CPI report is unlikely to convince Powell to adopt a firmly dovish stance (favoring monetary easing)," and added, "The seasonal trend that pushed the core CPI above expectations in January is expected to continue in February." She further predicted, "The Fed will initiate its first rate cut between May and June."
According to the Chicago Mercantile Exchange (CME) FedWatch, federal funds futures markets reflect expectations of three to four rate cuts this year. The market currently prices in over a 73% probability that the Fed will cut rates by at least 0.25 percentage points in June.
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