US CPI Preview: Prices Are on the Rise
By:Ilya Spivak
Financial markets are treading water amid a lull in trading activity. Futures tracking the bellwether S&P 500 stock index on Monday posted their lowest volume day since Jan. 9. A similar lull appeared in 30-year Treasury bond futures. The spotlight now turns to US inflation data for a catalyst to break the deadlock.
The May edition of US consumer price index (CPI) figures is expected to show headline inflation accelerated to 2.5% year-on-year, up from 2.3% in April. Perhaps most importantly, the core measure excluding volatile food and energy prices – the focus for Federal Reserve officials – is seen rising to 2.9%, the highest in three months.
Traders were heartened to see a relatively “normal” set of CPI figures in April, easing concerns about an inflationary spike amid the ratcheting up of tariffs by the Trump administration. However, subsequent producer price index (PPI) data revealed this was because businesses shielded consumers by absorbing higher input costs.
Since then, purchasing managers index (PMI) surveys from S&P Global and the Institute for Supply Management (ISM) have pointed to rising prices in the pipeline. Perhaps most strikingly, the latter figures revealed the fastest service sector price growth since November 2022.
Over the past decade, this metric has tended to lag headline inflation data – both CPI and the personal consumption expenditure (PCE) gauge preferred by the Fed – by approximately two months. That seems to anticipate reflation in the months ahead.
Whether this appears in this week’s data or not, it certainly seems to reinforce the sense that the US central bank will not be moved to cut interest rates any faster. As it stands, at least one 25-basis-point (bps) cut is priced in by October. The probability of a second before the end of the year stands at 56%.
Meanwhile, the markets seem to be convinced economic growth and not inflation ought to be the focus for policymakers. Inflation expectations priced into bond markets – so-called “breakeven rates” – have trended convincingly lower since the beginning of the year. That suggests recessionary forces are seen overwhelming reflation risk.
With that in mind, CPI data that gives the Fed another reason to remain on the sidelines may dent appetite for risk. Stocks are at risk in this scenario. At the same time, gold prices may rise alongside bonds at the long of the yield curve while the US dollar weakens as speculators position rate cut delay now translating to sharper catch-up easing later.
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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