Strategy
Investment Managers React To Stronger-Than-Expected US Inflation Data

After US inflation data came in stronger than either the US Federal reserve or the market expected last month, investment managers discuss the impact and the timing of potential interest rate cuts.
The US Bureau of Labor Statistics reported this week that US headline inflation was down in January to 3.1 per cent, from 3.4 per cent a month earlier. This is above economists’ predictions of 2.9 per cent, dashing expectations of an interest rate cut any time soon.
Core inflation, which takes out food and energy components, came in at 3.9 per cent, unchanged from December.
After hitting a peak rate of 9.1 per cent in June 2022, headline inflation has been moving closer to the Fed’s 2 per cent target. Despite the drop, the US Federal Reserve is not expected to cut interest rates, which stand at a high of 5.25 per cent to 5.5 per cent, any time soon, especially after the strong US non-farm payrolls a few days ago. Here are some reactions to the figures from investment managers.
Greg Wilensky, head of US fixed Income at Janus Henderson
Investors
“While the trend of core goods deflation remains solidly intact,
services inflation both including and excluding shelter came in
stronger than expected. The headline inflation number was
also boosted by a notable uptick in food inflation back to 0.4
per cent; we have not seen a food inflation print this high since
the beginning of last year.
“While the door for a March cut had already been effectively shut given the recent Fed commentary and the jobs reports, the Fed has now locked the door and lost the key. We do not think a May cut is out of the question, but it makes sense that the odds of a May cut being priced into the market have been substantially reduced. With this new data, a first cut in June seems like the most reasonable expectation unless we see a very quick, severe drop in labor market activity or a geopolitical shock.”
Rob Clarry, investment strategist at UK wealth management
firm Evelyn Partners
“With the Federal Reserve currently deciding monetary policy
based on the incoming data, it looks like this print will push
back the timeline for interest rate cuts. It comes on the back of
stronger-than-expected economic growth, a big upside surprise
from the January US jobs report, and resilient wage growth.
Traders now expect around four interest rates cuts in 2024, which
is down from the six expected just over a month ago. Similarly,
they have pushed back their expectations of when the first cut
will take place – assigning a 30 per cent chance of a cut at the
May meeting, which is down from 85 per cent in December. Bond
yields rose and the dollar strengthened in response to this.”
Mark Haefele, chief investment officer, UBS Global Wealth Management
"Equities fell and bond yields rose Tuesday after January US consumer price index (CPI) data showed an unexpected rise in monthly headline and core inflation. A jump in services inflation contributed the most to the stronger-than-expected CPI, and prompted investors to question if the Fed will keep rates on hold for longer. The ‘hot’ inflation data do not change our base case for a soft landing of slower growth, falling inflation and 100 bps of Fed rate cuts this year, likely starting in the second quarter. But we are continuing to monitor the incoming data and the start of rate cuts could be delayed should the economic data remain strong. There will be a number of economic releases before the next two Federal Open Market Committee (FOMC) meetings (19–20 March and 30 April/1 May), but rate cuts are not likely until the FOMC, in its own words has "gained greater confidence" that inflation is moving sustainably toward its 2 per cent goal. The next two CPI reports, 12 March and 10 April, will need to show further progress to justify a cut in May."
Tiffany Wilding, managing director and economist at US
fixed income manager PIMCO
“January’s consumer price index (CPI) inflation report was firmer
than expected. Although a lot can happen between now and the
middle of the year when Federal Reserve officials plan to begin
easing, continued reports like this risk delaying the start of
rate cuts. This report reaffirms our view that the US Federal
Reserve isn’t cutting rates until midyear (or later). Over the
last several months we have seen a reacceleration in the sticky,
domestically-driven core services ex shelter categories which
have been the focus of Fed Chairman Jerome Powell and other Fed
officials. We think today’s report should still worry Fed
officials.”
Nicolas Sopel, head of macro research at Quintet Private
Bank (parent of Brown Shipley)
“We continue to think that the last mile to the inflation target
could take some time to be reached as risks are getting more
balanced. Goods inflation is likely to remain benign as China
continues to export its deflation, base effects on energy prices
are likely to be more neutral. In terms of wage growth, the
deceleration continues albeit at a tepid pace, so that it should
help easing price pressures.
“The slowdown in inflation has bolstered expectations for the Federal Reserve to start cutting interest rates in 2024, and broadly supported markets. But we‘ve long held the view that markets priced in too many rate cuts and too early. We always thought a rate cut in March was very unlikely and markets have now completely priced it out. In our view, a first cut close to midyear is more likely with markets moving in our direction, fully pricing a first cut now in June.”
Ryan Brandham, head of global capital markets, North
America at Validus Risk Management
“Today’s US Consumer Price Index figure exceeded
expectations. This data suggests that the final stretch in
combating inflation might pose more challenges than anticipated
by the market. This will bolster the US dollar and prop up US
yields in Tuesday's trading session as the market revises its
near-term rate cut projections. Pushing back market
expectations for US rate cuts has been a prominent theme of 2024,
and this data will reinforce that theme.”
Josh Jamner, investment strategy analyst
at ClearBridge Investments
“Today’s hotter print was the final nail in the coffin for the
prospect of a March rate cut and will likely lead to renewed
debate around a “no landing” or overheating scenario. The
disinflation process is not a straight line, however, and one hot
print on its own after an extended string of more favorable
releases does not represent a new trend. Fed fund futures
are now pricing less than a 50 per cent chance of a May rate cut,
with the first cut fully priced in June and 3.8 cuts total in
2024. While the market is moving toward the Fed dots, we
believe that a May rate cut is still a possibility. Good news is
once again bad news, but through the last several years the
upside to earnings that accompanies hotter inflation has more
than overwhelmed the headwinds to valuations from higher interest
rates as evidenced by US equities trading near all-time highs.”
Chris Beauchamp, chief market analyst at IG
Group
"The inflation figures are the death-knell for any March
rate cut hopes. Things are still moving in the right direction
for the Fed on an annual basis, but now hopes of a soft landing
could start giving way to worries about an overheating economy
and the need for more hikes. US futures are lower, and this could
provide the catalyst for a reasonable pullback in stocks, perhaps
the one thing that can really shake the market into understanding
that the Fed is not going to move too soon on rate cuts."