US inflation cools, but unlikely to sway Fed on rate cuts - deVere's Green

May's CPI showed U.S. inflation cooling to 2.4% annually, with core inflation easing to 2.8%, both slightly below expectations; however, deVere Group CEO Nigel Green suggests the Federal Reserve is unlikely to cut interest rates soon due to tariffs feeding into prices and a slowing real economy. Green expects the Fed to hold rates steady through the summer, citing mixed economic data including strong wage growth and consumer demand alongside faltering business investment and surging debt issuance, advising investors to favor sectors with pricing power and cost flexibility given elevated yields and fluctuating market sentiment.

Analysis

U.S. inflation showed signs of moderation in May, with the annual Consumer Price Index (CPI) at 2.4% and core inflation, excluding food and energy, at 2.8% year-on-year, both slightly below market expectations and marking the fourth consecutive month of such undershoots. Despite this disinflationary trend, the Federal Reserve is perceived to be in a constrained position, as highlighted by Nigel Green of deVere Group, due to persistent inflationary pressures from tariffs and a slowing real economy. Consequently, the Fed is expected to maintain current interest rates through its upcoming meeting and likely the summer, with a September rate cut remaining uncertain. The economic landscape presents a mixed picture: a resilient jobs report indicates continued labor market tightness and strong consumer demand, yet business investment is faltering and debt issuance is surging. Compounding these complexities, existing tariffs, which a federal appeals court recently allowed to remain, are identified as an inflationary force counteracting the Fed's efforts, particularly as growth indicators show signs of weakening. The bond market also presents concerns, with record U.S. debt issuance and weakening foreign demand anticipated to keep yields elevated, thereby impacting asset pricing and refinancing risks across the economy. Market sentiment for the latter half of the year is expected to oscillate between optimism for monetary policy easing and apprehension about economic stagnation, with the Federal Reserve remaining data-dependent amidst these mixed signals.

Key Decisions for Investors

• Investors should consider reallocating portfolios towards sectors with demonstrated pricing power and cost flexibility, such as automation, energy, and selected infrastructure, which may prove more resilient in the current environment.
• Exercise caution with investments in debt-heavy and interest rate-sensitive market segments, given the likelihood of sustained elevated yields and the Federal Reserve's anticipated hold on interest rates.
• Closely monitor forthcoming Federal Reserve statements and key economic data releases, particularly on inflation, employment, and business investment, as these will be critical drivers of monetary policy and market direction.
• Prepare for continued market volatility stemming from the dual narratives of potential monetary easing and economic stagnation fears, recognizing the Fed's commitment to data-driven decisions over market sentiment.