Goldman Sachs Group analysts see potential for some more inflation cooling this summer.
“Our forecasts open up the possibility that the market may begin to focus more on the prospects of some inflation relief as we move into the second half of the year,” Goldman analysts Dominic Wilson and Kamakshya Trivedi said in an economics research note Monday. They said their current U.S. forecast is “looking for sub-3% sequential core inflation” through the second half of 2023, “beyond the next couple of prints.”
The U.S. Bureau of Labor Statistics will on Tuesday release May inflation data measured by the consumer-price index. Monthly CPI prints are closely watched by the Federal Reserve, which has been battling high inflation with interest-rate hikes, with the central bank scheduled to announce its decision on the trajectory of its benchmark rate at the conclusion of its two-day policy meeting on Wednesday.
The markers in the chart below indicate Goldman analysts’ forecast for the six-month annualized rate of so-called core CPI in the second half of this year, the first six months of next year and the second half of 2024. So-called core CPI strips out food and energy prices.
The previous CPI report showed headline inflation eased to 4.9% in April on a year-over-year basis, down from last year’s peak of 9.1% in June when the cost of living in the U.S. surged to the highest rate in more than four decades. Core inflation ran at 5.5% in the 12 months through April.
“Although we think inflation prints should improve more visibly, the very-near-term news may still push towards further worry about central bank hawkishness,” the Goldman analysts wrote, saying their forecast for core inflation is “a touch above consensus.”
While the Goldman analysts expect the Fed to “skip” raising its benchmark rate at its June policy meeting this week in favor of a July hike, the CPI data on Tuesday and a likely “upward shift” in the Fed’s so-called dot plot projecting the potential future path of rate policy “could reinforce the notion that the Fed has more work to do.”
The Fed’s policy rate is currently in the target range of 5% to 5.25%.
“As we move past those events, however, we think the risks are likely to become more balanced,” the Goldman analysts said, referring to the CPI print and the summary of economic projections expected from the Fed meeting this week.
The U.S. and the global economy continue “to tread the narrow path where growth is slow but mostly non-recessionary” and inflation is normalizing, “albeit gradually and unevenly,” the analysts wrote.
“The big picture remains that the recession that many market participants worry about is not imminent,” they said. “The most important reason for this worry – that the Fed would be forced to engineer one to rebalance the labour market and bring inflation down – has receded.”
‘Missing piece’
Core inflation has recently run hotter than headline numbers from the consumer-price index.
“Surveys of goods supply constraints are largely back to pre-pandemic levels,” while U.S. wage measures continue to “trend lower,” the Goldman analysts said. “The missing piece of the puzzle is a more pronounced decline in core inflation measures themselves, but we see signs in the U.S. that this may now lie ahead.”
While core inflation may “still be high relative to target,” the analysts said they “suspect that policymakers will be more willing to tolerate that overshoot as long as there is consistent progress in the right direction.”
Fed-funds futures indicated on Monday that traders expect a 72.4% chance of the Fed pausing its rate hikes at its policy meeting this week, and a 54.3% probability of the central bank raising its rate in July by a quarter percentage point, according to the CME FedWatch Tool, at last check.
“The market is already pricing a reasonable chance of near-term hikes,” the Goldman analysts wrote.
Read: How a hawkish Fed could kill a baby bull-market rally in U.S. stocks
Meanwhile, U.S. stocks were trading up Monday afternoon, with the Dow Jones Industrial Average
DJIA,
rising 0.3% while the S&P 500
SPX,
climbed 0.4% and the Nasdaq Composite
COMP,
gained 0.8%, according to FactSet data, at last check.
The S&P 500 has climbed around 12% so far this year.
In the bond market, the yield on 2-year Treasury note
TMUBMUSD02Y,
was down two basis points at 4.6% Monday afternoon, while 10-year Treasury yields
TMUBMUSD10Y,
were up about four basis points at around 3.78%, FactSet data show, at last check.
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