Speaker 0:
Joining me here on market moves. You have Janet Moy Head of market analysis at R B Credo and Janet, welcome back to the program. Thanks for having me back. So us inflation is at its lowest level in nearly two years. But that core C P I reading was quite stubbornly high. What do you think the fed are going to do in May when they meet?

Speaker 1:
Yeah, you're absolutely right. I I think, you know, headline inflation is slowing for sure, heading in the right direction currently at 5%. But core inflation, it actually picked up to 5.6% and that's actually too high. Uh I mean the fast target is too. So I think the implication is that because of this sticky inflation, the the Federal Reserve will just have to keep rates elevated. And because, you know, the R track so far is that the

Speaker 1:
fight to inflation is their priority and that that has not changed at all. Um So we think, you know, they will act according to what the median projections were in the dot plot that they released last time and it means 25 basis point uh more from here currently. So we expect the 25 basis point uh hike to happen in the main meeting. And that is basically fully priced in by financial markets

Speaker 0:
and digging a bit deeper into the reading while some prices still elevated.

Speaker 0:
And for those that haven't heard the term what's super core C P I?

Speaker 1:
Yeah, there are lots of uh terminology out there. Um I mean, so core C P I is still elevated because that's really related to the state of the labor market. But actually the the elephant in the room is shelter. So that's related to the housing component. And in fact, that's actually one third of the weight of the inflation, right? So that's very, very important. And the thing is shelter costs have been rise

Speaker 1:
think very sharply primarily because of the lack impact of the significant increase in us house prices. Um and that affects the rental cost as well. So, you know, until we see that slowing more meaningfully, I think Core will remain pretty sticky, right? The good news is that actually the rents currently are slowing down, but it's still not reflected in the inflation rate because there is a time lag.

Speaker 1:
Um So generally, we think, you know, the state of the labor market really matters, especially wage growth because if the labor market is tight company, uh workers can demand higher wages and then the companies will have to pass on to the prices, to the consumers and then there is a a spiral going on. So that's the risk there. And in terms of the super core inflation, basically that's core services inflation excluding

Speaker 1:
housing. So basically it's your inflation excluding food energy and any anything housing related. And the reason why the FED likes to look at it is because actually the housing data um the the price index has been quite volatile and it's been really hugely influencing the headline data and particularly the core index. And as I mentioned, there is a time lag and it doesn't really reflect the best of what the current rental data is.

Speaker 1:
So I think the FED really wants to strip all that and to look at a very pure measure of underlying inflation pressure that is related to discretionary spending power. So, so that's the super core inflation for you and it's still very elevated, it's actually 5.8%. So um it is way too elevated uh for the FED to be comfortable with

Speaker 0:
going back to slowing wage growth. There is there anything else behind that that's really working in the background?

Speaker 1:
So I think there is one very positive factor that we noticed. So aside from the slowing down in the headline inflation is, as you mentioned, actually, wage growth in the US has been slowing. So we had a peak wage growth of about 6% back in 2022 that has moderated currently to 4.2%. And I think a major reason is because uh labor participation rate has actually increased and

Speaker 1:
it is not just one of it has been steadily increasing over the past 12 months. And it is very encouraging because it means more labor going back into the US labor market. So effectively, meaning more supply of labor, which will usually help to push down a wage growth. So this is a positive development. But obviously, you know, it is still

Speaker 1:
way to elevate it uh 4.6% wage growth at the moment. So it it it still means pretty resilient and sticky core inflation. So I think what the fed wants to do is to pretty much cool down the labor market which is still resilient, cool down the labor market, thereby you can slow down wage growth further. And then there's more chance of bringing down that headline inflation towards two.

Speaker 0:
And you said markets have priced in a few rate cuts later in the year. But for now, do you think the fed are gonna hold steady?

Speaker 1:
Well, so basically we expect one more rate increase from May onwards. And that is basically what they have been communicating via the dodge plot like the official median interest rate projections. I mean it depending on the data, if we see a re acceleration in inflation or some other, you know, we are going to

Speaker 1:
get the personal consumption expenditure price index later. I mean markets could be expecting another interest rate hike um after May, right, if, if the fed officials come in and say we're not happy with the current data. So there's always a risk, but I think most market participants expect the fed to hold uh um at

Speaker 1:
um 5.25% at the upper bound. But the the bond traders, they are expecting rate cuts sometime this year later in the year, about two rate cuts. It actually, so I think there is a bit of a disconnect between what the fed official is currently communicating what the economists were expecting and what the bond market is pricing

Speaker 0:
it. Well, we'll be looking forward to those figures in May. Janet. Thanks very much for coming in. Thanks.