UBS still sees Fed cutting rates 4 times this year despite the inflation uptick

investing.com:

Both stock and bond markets experienced declines, as the US dollar saw an uptick on Tuesday, following the release of a less-than-favorable US consumer price index (CPI).

The data, especially the figures related to core services, was stronger than anticipated, heightening worries among investors about the possibility of the Federal Reserve delaying rate cuts until later in 2024.

According to the January inflation report, the headline CPI rose by 0.3% from December, surpassing the anticipated 0.2% month-over-month increase. Core CPI experienced a 0.4% rise, exceeding the expected 0.3%, driven by a 0.7% increase in core services prices, which more than offset a 0.3% decrease in core goods prices.

Despite unexpected inflation data, UBS strategists still expect the Federal Reserve to reduce interest rates by 100 basis points by the end of 2024, with the first cut anticipated in Q2.

Therefore, an increase in yields and a consolidation in the stock market, prompted by inflation uptick and a robust labor market report, does not come as unexpected, strategists said.

“In our view, it is unlikely that prices for core services will continue to rise at such a rapid pace, and we still expect inflation to slow in the months ahead,” they wrote in a note.

“So, the “hot” inflation data do not change our base case for a soft landing of slower growth, falling inflation, and 100bps of Fed rate cuts this year, likely starting in the second quarter.”