In recent weeks, markets have wound in their expectations for interest rate cuts. In fact, there’s been a big move since the start of the year when money markets priced in 150bps and more, of Fed rate cuts. We are now down to around just 30bps or so, and this picture has been seen globally as inflation hasn’t been falling fast enough to most central bank’s target of 2%. This has started to impact other markets with yields higher and stocks selling off.
Tomorrow brings a batch of the latest inflation reports from across the globe. Tokyo CPI, eurozone CPI and the US PCE Core data are all released to bring another fascinating period to a close. These reports will point the way for price action over the next few weeks, as traders eye up a series of incoming central bank meeting
The headline risk event will be the US data in the form of the personal consumption expenditures (PCE) deflator. This is an alternative measure of price pressures compared to the more widely known consumer price index (CPI) and the metric more favoured by the Federal Reserve. That is because the PCE is broader in coverage so better represents the spending patterns of US consumers and businesses.
Expectations for the US figures
The headline PCE prices are seen rising at an unchanged 0.3% m/m in April, with the annual rate also expected to be steady, at 2.7%. The key core measure is seen rising 0.2% m/m, a tenth lower than the prior, and the annual core PCE is seen unchanged at 2.8% y/y.
Headline CPI data was cooler than expected in April, while the core CPI metric saw the smallest increase since December. Meanwhile, the PPI data for the month surprised to the upside. But economists noted that the internals and components that feed into the PCE data, were more constructive. We note that the average of the prior three months is 0.36%, so we will be watching the decimal places. Interestingly, Goldman Sachs estimates that the market-based core PCE index, which has been referred to by Fed Chair Powell recently, rose just 0.18% m/m.
After a hawkish set of FOMC meeting minutes, and some cautious chatter from Fed officials, as well as constructive incoming data like the PMI figures, Fed cut pricing has been reduced sharply. Markets are pricing no easing at the Fed’s 12 June meeting, and only a 47% chance of a cut in September. We suspect a softer report will alter these odds more than a sticky one and hit the dollar harder. The flip side and a hotter report would see the greenback push higher, while gold and equity markets get sold.
Eurozone disinflation stalling?
Consensus forecast headline CPI to have risen one-tenth to 2.5% y/y and the core metric is set to hold steady at 2.7% y/y. The prior release saw the headline unable to make much progress, remaining at 2.4% amid an increase in food inflation and only a modest decline in energy inflation. The core print fell two-tenths from 2.9% due to moderating services inflation. This time, headline inflation may tick up on the back of higher energy prices, but core inflation should remain relatively stable.
However, it is worth noting that a hot release would come in the context of the firmer-than-expected region’s wage metrics which were released last week, along with a decent set of PMI figures.
The ECB is nailed on to cut rates in June according to market pricing, with policymakers also endorsing this move in recent weeks. However, traders may opt to continue scaling back expectations of what happens thereafter on a relatively hot report. There are now around 58bps of policy easing seen by year-end, versus 75bps only two weeks ago.
