To The Moon

The market had its popcorn ready for a soft inflation print, but instead, it got an extra-spicy serving of consumer prices. Headline CPI came in at 3.0% versus expectations of 2.9%, and core CPI posted 3.3%, exceeding the estimated 3.1%. The response? A market nosedive five minutes after the release, as traders frantically recalibrated their rate-cut fantasies.

But let’s cut through the noise—does this hot CPI print truly derail the Federal Reserve’s easing cycle? Or is the market overreacting (again)?

Inflation sizzles, markets wobble—will the Fed turn down the heat?

Reality Check: Did Markets Jump the Gun on Rate Cuts?

For months, investors have been banking on the Federal Reserve cutting rates as early as June. The CME FedWatch Tool now suggests September as the most likely starting point, but let’s be honest—expectations for rate cuts have been playing musical chairs for months.

Even before this CPI report, Fed officials were less than eager to rush into easing. In recent speeches, Chair Powell and company have repeatedly stressed that while inflation has cooled, it hasn’t yet reached the Fed’s comfort zone. And now, with inflation proving stickier than expected, it’s likely that the Fed will wait longer than many hope.

Simply put, the market’s initial rate-cut optimism might have been premature. Inflation isn't just a one-data-point problem—it’s an ongoing challenge, and this report reinforces that the Fed will need more evidence before reaching for the scissors.

What’s Next: One Cut, Two Cuts, Red Cut, Blue Cut?

How many times will the Fed cut rates this year? That’s the trillion-dollar question. Prior to this CPI print, expectations hovered around three cuts in 2024. But with inflation refusing to cooperate, that number could be revised downward.

A few scenarios could unfold:

1. The 'September and Done' Approach: If inflation remains stubborn, the Fed might deliver a single cut in September and pause to reassess.

2. The 'Two and Through' Path: If inflation moderates further but remains above target, we could see a cut in September and another in December.

3. The 'Three’s a Crowd' Outcome: If inflation miraculously cools over the next few months, a three-cut scenario could still be in play—but that’s looking increasingly ambitious.

For now, I’d put my chips on one or two cuts, with a third requiring an inflation miracle (or a serious economic slowdown).

Stock Market Jitters: Overreaction or Justified Panic?

Let’s not sugarcoat it—hot CPI data is not what the bulls wanted to see. Higher-for-longer rates aren’t exactly a catalyst for record-breaking stock market rallies. However, history shows that knee-jerk selloffs to inflation surprises often fade within days or weeks.

The key thing to watch? Corporate earnings. If companies can maintain strong profit margins despite higher interest rates, the market can still grind higher. But if inflation eats into margins and demand softens, we could be in for a rougher ride.

Sectors to watch:

• Tech & Growth Stocks: More sensitive to interest rates, so short-term volatility is expected.

• Financials: Higher rates for longer could benefit banks, but rate cut delays may curb enthusiasm.

• Consumer Discretionary: Rising inflation pressures on consumers could dampen spending.

Final Take: Keep Calm and Watch the Data

While this CPI report throws a wrench into early rate-cut expectations, it doesn’t entirely derail them. The Fed will still likely ease at some point this year, but the road to cuts may be bumpier than the market initially thought.

For investors, the game plan remains the same—stay nimble, watch inflation trends, and remember that rate cuts are a ‘when’ not ‘if’ scenario. But if you were betting on a June or July cut, you might want to hedge your enthusiasm.

As always, markets love drama, but the Fed? Not so much. So for now, patience remains the best trade.

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