CPI exceeded expectations, and Wall Street began to discuss whether the Fed would raise interest rates by 75 basis points

Barclays became the first major Wall Street bank to expect the Federal Reserve to raise interest rates by 75 basis points, and even predicted that it may raise interest rates by 75 basis points next week. Goldman Sachs believes that the Fed will raise interest rates by 50 basis points each time in June, July, and September. Bloomberg strategists believe that while the market may price in a 75 basis point rate hike, the Fed will not seriously consider that magnitude.

The U.S. CPI in May both surpassed expectations and grew by 8.6% year-on-year, hitting a new high in 40 years after March. In May, the CPI increased by 1.0% month-on-month, of which energy prices increased by 3.9% month-on-month and food prices increased by 1.2%.

Perhaps even more shocking about the May CPI data, Aditya Bhave, senior U.S. and global economist at Bank of America, pointed out that the report had little weakness. Brean Economics pointed out that there is no sign of inflation slowing down, with 61% of the CPI components recording at least 6% year-on-year growth in May, and 63% of the sub-data that recorded similar high growth rates in April.

Therefore, the commentary believes that the May CPI report is in line with the increasingly prevailing view that inflation is no longer just the product of disruptions in the supply chain of goods, it is also driven by strong consumer demand and strong wage inflation. promote.

Faced with such an acceleration in inflation, what will the Fed do next? Will there be any new changes in addition to the 50 basis points each in June and July, which is widely expected by the market?

An earlier Wall Street News article mentioned that swap market pricing shows that the market expects a 50% probability of a 50 basis point rate hike in July.

Barclays became the first major Wall Street firm to expect the Fed to raise rates by 75 basis points. Some traders see a 50% chance of a 75 basis point rate hike by the Fed in July, while Barclays expects that amount to be raised as soon as next week, or this month.

Barclays economist Jonathan Millar said that now the Fed has good reasons to raise interest rates in June by a rate that exceeds market expectations. The Fed may raise interest rates by 75 basis points in June or July, and now it is expected to be possible in June. Such a hike. Barclays analysts commenting on the May CPI said it’s not just headline inflation; if all this came from energy, we would tend to ignore it, but everything in this report is very strong and is getting stronger. “

Quincy Krosby, chief equity strategist at LPL Financial, also mentioned that the Fed meeting next Tuesday to Wednesday will be particularly important, and the market wants to hear how the Fed is expected to fight costs that have exceeded economists generally forecast. There will obviously be more rate hikes ahead, but maybe the Fed will start talking about a 75 basis point possibility.

Bank of America’s benchmark forecast remains for a 25 basis point rate hike in September, but noted that the May CPI increases the risk of a 50 basis point rate hike in September.

Goldman Sachs chief economist Jan Hatzius commented that the overall strengthening of core CPI inflation will bring decisive changes to the Fed, allowing the Fed to extend the pace of interest rate hikes by 50 basis points each into September. Goldman Sachs continues to expect the terminal rate to rise to 3.0 to 3.25 percent in the first quarter of next year.

Ira Jersey, chief U.S. rates strategist at Bloomberg Industry Research, commented that the bear market flattening of the U.S. Treasury yield curve is likely to continue at least until next week’s Federal Reserve FOMC meeting. We still don’t think the Fed will seriously consider a 75bps rate hike, but the market may be pricing in a rate hike of this magnitude. Given the strength of the core CPI, the market is pricing in more than one rate hike of 50 basis points after September. The Fed may try to move into restrictive territory above neutral this year, and may consider pausing action amid rate hikes toward 4 percent in order to allow much-lag monetary policy to work.

Priya Misra, head of global rates strategy at TD Securities, commented that the market is closer to pricing in a 50bps rate hike in September, which would be scary for risk assets, as the Fed may not either after letting rates go to neutral. Slow down.

Greg Bassuk, CEO of AXS Investments, believes that investors’ interpretation will be more focused on how long high inflation will be with us, rather than whether inflation has peaked. One of the big lessons we’ve learned over the past year is that there is a lot of uncertainty in any single data. We’ll watch the U.S. PPI next Tuesday, and next Wednesday, we’ll see data on retail sales, as well as some post-Fed comments.

The annual pace of inflation may be very close to its peak, but it probably has nothing to do with the Fed’s path to monetary tightening or valuations in bonds and stocks, said Michael Darda, chief economist and market strategist at MKM Partners. Because if inflation slows on a current basis and is still very high, that’s not an environment for the Fed to stop, and what we’re seeing now is some kind of major revaluation of high-cap stocks.

Seema Shah, chief global strategist at Principal Global Investors, commented that the CPI data this time is ugly. While inflation will eventually come down anytime, it will be a painfully slow process. The Fed’s resolve for price stability is now truly being tested. Even if the economy is struggling, aggressive rate hikes will need to be relentless until inflation finally starts to subside. The probability of a Fed put option is already very low, and it is time to put it firmly.

Dennis DeBusschere, founder of 22V Research, said the CPI numbers were poor. With the labor market tight and core CPI not falling month-on-month, Fed Chairman Powell should sound very hawkish after next week’s FOMC meeting.

Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, commented that the Fed will face greater control of inflation pressures, and will need to raise interest rates by at least 50 basis points in the next three meetings and by the end of the year, and need to reassess the plan to shrink its balance sheet. While no recession is expected this year, there are plenty of concerns around rising interest rates, increased volatility and reduced liquidity.

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