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This week’s good economic news was just that… good news
CNN — (CNN) — “Good news is bad news” has been a common refrain for some time.
When solid economic reports are released, they are often clouded by concerns that good news for the economy actually means a longer wait before the Federal Reserve implements rate cuts.
This week, a series of good news was actually good news: closely watched inflation indicators showed that prices had cooled more than expected; Americans’ financial outlooks were more optimistic than they had been in years, while their inflation expectations were declining; and on Friday, US import prices reversed course and fell sharply, adding fuel to the disinflationary fire.
“What we saw in the data is a reaffirmation of the idea that the economy, hiring and inflation are cooling, which should create the conditions later this year for the Federal Reserve to relax its restrictive policy rate,” said Joe Brusuelas, director and chief economist at RSM US. “And long-term interest rates will fall, which means the cost of financing to buy a car, a dishwasher or a washer or dryer, everything will fall.”
He added: “That’s good news.”
This week – with its multiple inflation reports, a Fed meeting, a new central bank rate cut schedule and economic projections, and a slew of ancillary data – had all the makings of a market booster and path forecaster. economic.
And it definitely worked.
On Monday, new data from the New York Fed survey showed that US consumers reported greater optimism about their current and future financial situation, the stock market and the continued slowdown in inflation.
On Tuesday, the National Federation of Independent Business’ optimism index reached its highest level of the year (although business uncertainty also increased).
But there was little data on what would happen on Wednesday.
Inflation as measured by the Consumer Price Index cooled more than expected in May, with prices remaining stable in the month for the first time since July 2022. On an annual basis, consumer prices increased by 3.3% compared to the previous year, slowing down from 3.4% in April. to assess,
Falling gas prices did their part, as did food price stability, but a key indicator of underlying inflation also cooled. Core CPI rose just 0.2% for the month (the slowest pace since October last year) and its annual rate fell to 3.4%, setting a new three-year low.
“The disinflationary trend we saw in 2023 is reasserting itself to the extent that the seasonal noise we normally see in inflation at the turn of the year was just that, ‘noise’,” said Brusuelas.
The weak CPI reinforced investors’ expectations that interest rate cuts could occur as early as September.
The Fed, donning its hard-line hat, tried to do a spoilsport later in the afternoon when it kept rates at current levels once again, and officials signaled just one rate cut for the rest of the year, down from three predicted last December.
Markets don’t appear to be buying the one-time cut plan, especially after the Producer Price Index on Thursday showed that wholesale prices fell from April to May and the BLS’s Export-Import Price Index showed that US import prices fell 0.4% in May, after rising 0.9% in April.
Excluding gas prices, imports still fell 0.3%.
“Everywhere Fed officials look, inflation is now in a cooling phase after the worrying first quarter crisis,” wrote Chris Rupkey, chief economist at FwdBonds, in a note on Friday. “Fed officials did not see what they expected from the inflation trend when they met earlier this week, but the winds of change are coming for these pessimistic inflation outlooks as the economy may be slowing more than expected. expected at the end of the second quarter.” .”
“We wouldn’t rule out a first rate cut in September; the market does not,” Rupkey wrote.
And more good news will likely come next week and later this month, Brusuelas said.
Rising inflation at a slower pace will give Americans more comfort in terms of overall spending, he said, adding that this should be visible in next week’s retail sales report. Furthermore, the disinflation seen in the CPI and PPI is setting the stage for an equally weaker report in the Fed’s preferred inflation gauge: the Personal Consumption Expenditures price index, which will be released later in the month.
“There is a real possibility that we will not see any increase on a monthly basis and that inflation will slow to the 2.5% to 2.6% range,” he said. “At this point, we are very close to the Fed’s 2% target, and we have to talk seriously about rate cuts in the near term.”
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