Fabian Estevez

The Consumer Price Index (CPI) posted a modest 0.3% increase in April 2024, following a slightly higher 0.4% increase in March, beating expectations that also anticipated a 0.4% increase. With this, the CPI climbed 3.4% annually from 3.5% in the previous month. On the other hand, core inflation excluding food and energy (Core CPI) continued its steady increase of 0.3% in April, similar to the previous three months and in line with expectations. However, in its annual variation, it observed a deceleration to 3.6% from 3.8% and resulted in the lowest since April 2021.

Below, we share the performance of the key components:  

• Energy: The energy index rose 1.1% in the month, maintaining the same increase as in March. This increase was significantly influenced by a 2.8% increase in gasoline prices. Annually, the energy index increased 2.6% with a 1.2% increase in gasoline prices.
• Food: Food indexes showed little change overall. The food at home index decreased slightly by 0.2%, while food away from home increased by 0.3%. With these data, the overall food index rose 2.2% over the past twelve months, with a significant 4.1% increase in food consumed away from home.
• Housing Costs: These continue to be an important driver of the index, after rising 0.4% in the month. Over the last twelve months, the lodging index increased 5.5%, indicating that housing costs maintain persistent upward pressure. Importantly, this category contributed substantially to the 3.6% annual increase in the core index.

Finally, the transportation and medical care categories recorded notable increases. In this sense, transportation services increased by 11.2% in the last year (0.9% in the month), while medical services saw a more moderate increase of 2.7% (0.4% in the month).

In this context, it can be concluded that the April report, to some extent, offers positive news that could provide some relief to the FED. However, the reality is that sustained inflationary pressures continue to be seen in terms of energy and housing costs. Therefore, markets may continue to navigate a higher interest rate environment for some time to come, at least until it becomes clearer that inflation is moving more strongly toward the FED’s 2% long-term target. Given this data, as well as the latest employment figures, the consensus is for the FED to leave the reference rate unchanged at 5.25 – 5.50% for the June 12 meeting. 

Change (%) in the last twelve months in CPI and Core CPI

Source: U.S. Bureau of Labor Statistics

Monthly change (%) of CPI

Source: U.S. Bureau of Labor Statistics

Key employment figures for the month of April were recently released and showed a weaker than expected performance and a marked slowdown compared to previous months. In this sense, nonfarm payrolls posted 175,000 jobs last month, down from the average of 269,000 jobs during the previous three months, and implied the lowest gain since October of last year.

Breaking down the data, the public sector was the main driver of this decline in reported job growth for April, as only 8,000 government jobs were added, compared to an average pace of 60,000 over the previous six months. For its part, the private sector continued to add jobs at a solid pace in April (+153,000), with the health care and social assistance sector accounting for more than half of these jobs (87,000).

As another sign of subdued labor demand, it is noted that the average workweek fell to 34.3 hours, and the unemployment rate rebounded slightly from 3.8% in March to 3.9% last month. Finally, average hourly wages increased by only 0.2% in the month, and with downward revisions from the previous month. Against this backdrop, annual wage growth declined to 3.9% from last year’s average of 4.4%. While all of these figures were less robust than in previous months, overall, they still reflect a healthy labor market environment.

That said, April’s employment figures, together with the first estimate of the 1Q24 GDP, which experienced an annualized growth of 1.6%, down from the 2.4% expected and 3.4% in the 4Q23, would be reinforcing the idea that the economy is heading towards a “soft landing”, the central scenario proposed for this year.

Regarding the potential implications of monetary policy, from the possible implications of monetary policy, it will be important to observe whether the next employment reports maintain this cooling trend. However, we do not rule out that FED officials have interpreted these figures positively, seeing them as a welcome sign that the labor market continues to reach a better balance and that monetary policy is tight enough. Next week will be crucial, as inflation for the month of April will be released. A slight expected decline to 3.7% annually  (excluding the volatile energy and food components) is expected. So far, consensus broadly indicates that the federal funds rate will remain in the 5.25% to 5.50% range for the next meeting on June 12.  

Nonfarm payrolls evolution 

• Monthly change, figures in thousands. 

Source: JP Morgan

The Federal Reserve (Fed) made the unanimous and widely expected decision to once again keep the target range for the federal funds rate unchanged at 5.25% – 5.50%, its highest level in the past 22 years. Since July of last year, the benchmark rate has remained unchanged. This decision comes in a context of accelerating inflation during the current year, placing it at 3.5% annually in March (3.8% annually excluding components with higher volatility such as food and energy), up from 3.2% in February.

On the other hand, the statement described that the latest employment indicators have shown solid performance, while inflation has decreased over the past year, although it remains elevated. In that sense, it was highlighted that, in recent months, there has been a lack of additional progress toward the Committee’s 2% inflation target. Therefore, it was reiterated that it is not expected to be appropriate to reduce the target range of the benchmark rate until there is greater confidence that inflation is moving sustainably toward its goal, and it will remain highly attentive to inflation risks. Despite the above, the Committee considers that the risks to achieving its employment and inflation objectives have moved towards a better balance in the last year.

Finally, an adjustment to its program of reducing holdings of Treasury bonds, agency debt, and agency mortgage-backed securities known as “Quantitative Tightening” was announced. Starting on June 1, only US$25 billion in Treasury bonds will be allowed to run off each month, compared to the current US$60 billion. Mortgage-backed securities will continue to run off by up to US$35 billion monthly.

During his press conference, Jerome Powell primarily highlighted that he considers it unlikely that the next interest rate move will be an increase, emphasizing that for now, that scenario appears improbable.

Evolution in the number of expected rate cuts for the federal funds rate

Source: Raymond James

It was recently announced that China’s economy advanced 5.3% annually in the first quarter of the year, a slight acceleration compared to the 5.2% rate of the 4Q23, and above the 4.6% expected by the consensus. Quarterly growth was 1.6% (vs. 1.2% in the 4Q23 and 1.4% expected). This result was driven in part by external demand, as export volume increased by 14% annually. However, as for the real estate sector, it continued to show a weak performance, after property investments declined by 9.5% annually in the 1Q24. The square footage of new commercial buildings sold fell 19.4% annually.

On the other hand, although the latest figures, corresponding to March, showed increases, they did not end up convincing, with industrial production advancing 4.5%, below the 6% estimate; while retail sales grew 3.1%, below the 4.6% forecast, and fixed asset investment grew 4.5% annually, slightly exceeding some expectations. Finally, the unemployment rate in major cities declined slightly to 5.2%, breaking a three-month streak of increases.

As can be seen, economic activity is showing divergent signals, with production growth stronger than consumption growth, and within fixed asset investment, real estate investment will continue to disappoint (mainly due to the problems faced by developers).

Under this mix of factors, the perspective that this economic performance would make the government comfortable with current policies is beginning to gain traction. Therefore, the impact of new stimulus (fiscal – monetary) would be reduced in the very short term, due to the pressure it could generate on banks and the additional pressure that the Yuan (CNY) could experience now that the Fed’s rate cuts could take longer than originally contemplated. However, the consensus baseline scenario still suggests that the economy could expand by 4.7% this year, which is in line with the government’s projection of “around 5%” growth.

China’s GDP growth

(Y/Y): Refers to annual growth

(Q/Q): Refers to quarterly growth

Source: Reuters

Understanding the dynamics of financial markets is crucial in the investment world, just as recognizing the psychological factors that influence our decision-making process. Behavioral finance addresses various biases and cognitive shortcuts that can lead investors to make poor decisions, impacting both short-term actions and long-term results. By becoming aware of these mental states and implementing strategies to mitigate their impact, we can improve our ability to make rational and disciplined investment decisions aligned with our financial objectives. In this context, we share some key points that can help mitigate these biases:

• Rationality vs. Loss Aversion: When facing potential losses, it’s natural to feel a strong emotional response. However, resisting the urge to make irrational decisions driven by fear is essential. Maintaining a long-term perspective and focusing on investment fundamentals can help navigate turbulent markets. Regularly reviewing your investment strategy ensures alignment with financial objectives and risk tolerance.
• Beware of Overconfidence: While confidence in our abilities can be empowering, overconfidence may lead to excessive risks and wrong decisions. Recognize that predicting market movements with certainty is impossible, necessitating a receptive and humble approach. Diversifying the portfolio and seeking objective perspectives from industry experts can mitigate overconfidence.
• Question the Herd Mentality: Following the crowd is tempting, especially in uncertain times. However, blindly following the herd can lead to unwise investment decisions. Cultivate an independent mindset, relying on critical analysis and research before making decisions. Evaluating information critically and seeking diverse perspectives are crucial for making justified decisions based on analysis and conviction.

In conclusion, understanding and managing behavioral biases is essential for making informed decisions in investing. Supported by a financial advisor, these skills become invaluable for developing and implementing strategies aligned with established objectives. Remember that investing is a long-term process, requiring discipline, patience, and a commitment to continuous learning.

Annual returns and intra-year declines of the S&P 500

Although historically there has been an average intra-annual decline of 14.2%, annual returns have been positive in 33 of the last 44 years.

Source: JP Morgan