What Does a Rate Cut Mean?
We should be careful what we wish for.
We’re back to “Being Jerome Powell.”It’s been a refreshing earnings-and-economics-driven rally so far in May, but this week investors, traders, and speculators will be preoccupied with occupying the mind of the world’s No. 1 central banker.
“What’s he thinking about Producer Price Index and Consumer Price Index data for April?” is the question they want answered.
In a minor twist, we’ll see PPI data first this time around, at 8:30 a.m. tomorrow, with CPI to follow at 8:30 a.m. on Wednesday from the Bureau of Labor Statistics.
The Fed Chair himself is actually scheduled to participate in a moderated discussion with De Nederlandsche Bank President Klaas Knot at the annual general meeting of the Foreign Bankers’ Association in Amsterdam at 10:00 a.m. on Tuesday.
He’s unlikely to directly address that morning’s PPI news.
Anything he does say about inflation and interest rates will show up in that day’s price action, and quickly.
According to FactSet, earnings per share will grow 5.2 percent year over year, up from a forecast of 3.4 percent as of March 31. That would be the fastest pace of earnings growth since 2022.
And the consensus forecast for second-quarter earnings growth has risen from 9 percent to 9.8 percent.
There’s still some work to be done, with retailers to report starting this week and Nvidia $NVDA to conclude this chapter of “The Magnificent Seven” story on May 22.
We’ll also see US retail sales data for April on Wednesday at 8:30 a.m. ET. as well as multiple housing sector and sentiment reports during the week.
The big number, though, is April CPI.
The consensus expects the BLS to report a 3.4 percent year-over-year rise in the key inflation gauge. That would mark a slowdown from 3.5 percent in March.
The forecast for core CPI – which excludes food and energy prices – is 3.6 percent, down from 3.8 percent in March.
Let’s think something through here, prompted by Randal Forsyth of Barron’s and his May 10 Up and Down Wall Street column.
As Forsyth notes, earnings look good because numbers are exceeding forecasts. But sequential and annual comparisons are less shining.
And he suggests that estimates for second-quarter and full-year growth assume top-line growth that’s not supported by much.
Finally, let’s say we do see a rate cut. Maybe this week’s PPI and CPI data are so soft as to convince Powell & Co. that inflation is indeed trending toward the Federal Reserve’s 2 percent target.
The implication is the economy is slowing, people, and if the economy is slowing earnings are too. If the Fed cuts, be prepared to talk about earnings disappointments later this year.
That’s the rest of the story.