US CPI Inflation and Consumer Confidence Data: Macro Week Ahead
US CPI Inflation and Consumer Confidence Data: Macro Week Ahead
By:Ilya Spivak
Will the markets start to care about US recession risk as the Fed continues to dither?
- Markets shrugged off breathless headlines as stocks and Treasury yields rose together.
- US inflation and consumer confidence data headline the economic calendar this week.
- Will traders care about recession risk as the Fed resists supporting gloomy consumers?
As the dust settled on another week of fiery headlines from Washington DC, a cautiously positive tone seemed to prevail across financial markets. Stocks finished the week on the upside, with the bellwether S&P 500 adding 1.5%. The tech-tilted Nasdaq 100 performed a touch better with a rise of 1.9%.
Bond yields rebounded across the Treasuries curve, with ten- and two-year rates rising 2.5% and 3.5% respectively. Cycle-sensitive crude oil prices surged, posting a 6.2% gain that brought them to a six-week high. A pro-growth message seemed to emanate from currency markets too as the euro rose while the Japanese yen fell against the US dollar.
US inflation set to rise, keeping the Fed in wait-and-see mode
The economic calendar will offer a clear opportunity to test this optimism in the week ahead. The critical question facing traders is likely to be whether the economy is strong enough to power ahead without support from the Federal Reserve as central bank officials go mum ahead of a policy conclave on June 18.
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First up, US consumer price index (CPI) data is expected to show that headline inflation accelerated to 2.5% year-on-year in May, up from 2.3% in the prior month. Perhaps most importantly, the core measure excluding volatile food and energy prices – the focus for Fed officials – is seen rising to 2.9%, the highest in three months.
Such a result seems likely to cement near-term inaction at the US central bank. Benchmark Fed Funds interest rate futures reveal that markets have firmly dismissed the possibility of a rate hike in June or July. At least one 25-basis-point (bps) is priced in by October. The probability of a second one before the end of the year stands at 60%.
Has US consumer confidence found a bottom?
Next, a preliminary look at this month’s consumer confidence survey from the University of Michigan is penciled in for a slight improvement after sentiment dropped to a three-year low in April and held there in May. The anchoring on display last month came as deepening pessimism about current conditions was offset by a modest uplift in expectations.
Consumption is the biggest driver of US economic growth, accounting for over 68% of gross domestic product (GDP). It was worryingly weak in the first quarter, posting the smallest contribution to overall output in nearly two years. Leading economic data, like April’s soggy retail sales and the ongoing rise in jobless claims, hint at ongoing weakness.
If sentiment is broadly downbeat, the markets will be left with an economy that appears to be inching toward recession and a central bank that is unwilling to be proactive in combating it. That hardly sounds supportive for stocks or the US dollar and seems primed to lift bonds and gold, but when traders are prepared to act like it remains unclear.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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