As the US economic data continues to strengthen, the market's expectation for a Federal Reserve rate cut may face a significant test. The inflation rate, announced last month for March CPI data, surpassed expectations, significantly undermining the market's confidence in rate cuts. The upcoming April CPI data has become the focal point for investors and economic observers, especially as Federal Reserve Chairman Powell has stated that the future of rate cuts is unclear.
According to related reports, the market believes that the Fed's policy tendency is no longer the decisive factor; more crucial are the economic and inflation data. In this context, the latest report by Steven Englander, the Chief Currency Strategist at Standard Chartered Bank, has attracted wide attention. His analysis suggests that closely monitoring housing costs, particularly the CPI's housing inflation indicators—like the Owner's Equivalent Rent (OER)—could offer a new perspective on inflation.
Englander's analysis suggests that the unusual increase in OER in the past few months may be a temporary phenomenon, with downward pressure expected in the coming months, possibly even a sharp decrease. He forecasts a mere 0.29% quarter-over-quarter increase in OER inflation for the second quarter, a projection that could result in a core CPI growth rate lower than market expectations. Englander further indicates that this slowdown in OER could lead the Fed to reconsider the timing of rate cuts.
However, Englander also mentioned two major risks in his analysis. First, the BLS and the Fed release experimental series on rental data quarterly, so there could be inaccuracies in judging monthly changes. Secondly, a high demand for single-family homes could lead to rent increases, potentially impacting OER data.
Englander expressed surprise at Powell's stance. Powell's confidence in future housing cost reductions possibly lowering core inflation, and his shift away from so-called "super core inflation" to focusing on reduced rent inflation, was unexpected to him.
The April CPI data to be released next week will be a significant indicator for the market. Investors will closely watch the performance of inflation data, especially changes in OER, to determine the direction of future Fed policy. As the economic recovery momentum continues, a slowdown in inflation could reignite market expectations for rate cuts, but risks remain, requiring continued caution.
