Yesterday was an ugly day in the markets as investors factored in a hotter-than-expected consumer price index (CPI) reading. Consumer prices rose 0.4% over the past month, hitting 3.5%, and spurring concerns that interest rate cuts may be taken off the table this year entirely.
Such a narrative has bled into the idea that a stock market crash could be on the horizon. The longer the Federal Reserve waits to start rate cuts, the longer these fears are likely to hold.
That said, a wholesale inflation print today is telling a bit of a different story.
The Producer Price Index (PPI) came in 0.2% higher in March, less than the 0.3% estimate economists had put forward. This is calming concerns that inflation is in fact reaccelerating. It also suggests inflation is still actively calming.
Stock Market Crash Concerns Increase Amid Mixed Inflation Data
Certainly, the macroeconomic narrative held by economists and investors is always shifting. The bond market has gone from pricing in 150 basis points of interest rate cuts at the beginning of the year to just 65 basis points as of yesterday. Stickier-than-expected inflation is the culprit here. And without inflation coming in at 2%, it is unlikely we will see the Federal Reserve move at its next two meetings.
So, interest rate cuts are likely farther away. And some at the Fed think interest rate cuts may not be on the table until Christmas, or even next year. Talk of another increase is starting to pick up. And given how interest-rate-sensitive so many areas of the economy are, that’s not great for investors in certain industries.
I think we may certainly see continued pressure in rate-sensitive pockets of the economy. I also think the Fed could be playing a game of chicken in waiting too long to bring rates down, affecting jobs and economic performance for a longer period of time.
I’m not going to say a stock market crash is evident on the horizon, or that it’s more likely than a soft landing. But I do think the chances of a crash increase the longer the Fed continues to assign a much higher weighting to backward-looking data than more current inflation measures out there (such as current rents).
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
