CPI risk, oil pass-through push Fed cut timing further out

Major Wall Street banks are retreating from earlier dovish calls on Federal Reserve policy. Goldman Sachs and Bank of America have delayed their first-rate-cut forecasts from June to later in the year, citing stronger-than-expected labor market data and the risk of pass-through inflationThe rate at which prices rise across an economy. from elevated oil prices. The April CPI print, due Wednesday, will be particularly important because it captures the period when pump prices surged due to the Iran conflict, creating material upside risks to headline and core inflation expectations.

Market participants are bracing for a "spicy" inflationThe rate at which prices rise across an economy. print according to Morgan Stanley's global head of macro strategy. Current consensus expects CPI to come in at 3.7%, well above the Federal Reserve's 2% target and up 0.4% month-over-month. If the print exceeds expectations, it would likely trigger another delay in rate-cut timing and potentially force the Fed to maintain a higher "terminal rate" than previously priced into markets. The 10-year Treasury yield has already climbed on this repricing, and real-term rates appear set to remain elevated for longer than the market assumed six weeks ago.

For equities, a delay in Fed cuts is a mixed signal. On one hand, it supports the case for a strong economy and reduced recession risk. On the other hand, it pressures high-growth and rate-sensitive equities that have benefited from the assumption of rapid monetary easing. Tech and growth stocks have already factored in a certain path of Fed easing; a sustained hold or modest tightening bias could reduce their multiple expansion. Bond yields rising would also rePrice the discount rate applied to future AI capex returns, potentially impacting long-durationBond price sensitivity to interest rate changes. tech and growth narratives.

The debate hinges on whether oil-driven inflationThe rate at which prices rise across an economy. is transitory (mitigated by a ceasefire) or structural (if Hormuz remains closed). A rapid end to the Iran conflict could ease inflation concerns and allow the Fed to cut sooner. But if stagflation concerns materialize, the combination of weak growth and sticky inflation would challenge both equities and bonds, likely driving a re-risk-off rotation toward defensives and real assets.