Markets seem to be embracing the notion of a soft landing for the U.S. economy despite inflation remaining above the Federal Reserve’s 2% target.
“Soft landings are not impossible, but they’re pretty improbable,” said Bob Elliott, co-founder, chief executive officer and chief investment officer at Unlimited Funds, in a phone interview. “They’re particularly challenging in an environment where the labor market is tight,” he said, and yet “many investors are sort of enamored with this idea that we could get a soft landing.”
The U.S. stock market was rising Wednesday after fresh data showed inflation rose in June slightly less than expected. Meanwhile, the unemployment rate remains low in the U.S., with wage growth helping to fuel consumer spending in an economy that grew at a revised 2% annualized pace in the first quarter.
“There’s a race going on between the Fed slowing the economy down, and then on the other side, inflation becoming entrenched,” said Elliott. In that race, the Fed has been “one or two steps behind,” he said, ahead of Wednesday’s inflation reading.
The consumer-price index showed U.S. inflation rose 0.2% in June for a year-over-year rate of 3%, according to a report Wednesday from the Bureau of Labor Statistics. Core CPI, which excludes energy and food prices, increased 0.2% last month for a year-over-year rate of 4.8%. The Bureau of Labor Statistics said core inflation’s rise in June marked the smallest monthly increase since August 2021.
“The Fed will see the June CPI report as progress, but they are still very likely to raise the target rate a quarter percent at their decision in July,” Bill Adams, chief economist for Comerica Bank, said in emailed comments Wednesday. “The Fed would rather overtighten and slow the economy more than necessary than under-tighten and risk inflation accelerating when the economy regains momentum.”
Many investors have been expecting the Fed to hike its benchmark interest rate by a quarter percentage point at its policy meeting later this month, which would bring it to a targeted range of 5.25% to 5.5%. Federal-funds futures on Wednesday pointed to a 92.4% probability of such a rate hike and a slightly more than 80% chance of the Fed then pausing at its next meeting in September, according to CME FedWatch Tool, at last check.
After the expected increase in July, traders in the fed-funds-futures market were on Wednesday largely expecting the Fed to hold rates steady for the rest of the year.
“The bulls get their wish – CPI print came in better than expectations,” said Rhys Williams, chief strategist at Spouting Rock Asset Management, in emailed comments Wednesday. “We think the danger now is that the Federal Reserve does one too many rate increases and the soft landing turns into something harder.”
In Elliott’s view, both the stock and bond markets lately appeared to be embracing the idea of a soft landing for the economy.
The yield on the two-year Treasury note, which recently has been trading below the Fed’s benchmark rate, tumbled after the CPI report was released Wednesday. Two-year yields
TMUBMUSD02Y,
were down about 16 basis points around midday Wednesday at 4.73%, according to FactSet data.
“As the Fed has moved interest rates to very restrictive levels thus far, and probably will execute another hike or possibly two from here, we think that patience should be a real virtue in their overall disposition toward ongoing monetary policy,” said Rick Rieder, BlackRock’s CIO of global fixed income and head of the firm’s global allocation investment team, in emailed comments Wednesday. “Today’s CPI report for June displayed notable moderation, which is good news for policy makers, markets and households overall.”
U.S. stocks were up Wednesday afternoon, with the S&P 500
SPX,
gaining 0.7% while the Dow Jones Industrial Average
DJIA,
rose 0.4% and the Nasdaq Composite
COMP,
advanced 0.9%, according to FactSet data, at last check. The stock-market’s fear gauge, the Cboe Volatility index
VIX,
was down more than 7% at 13.8 around midday Wednesday.
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