US May CPI Inflation The Main Dish Today

US stock markets retained positive momentum yesterday with the three main indices rising by 0.55% (Dow) to 1.5% (Nasdaq). The S&P 500 rose by almost 1%, closing above the August 2022 top. Tech bell weather Nasdaq cleared that same technical hurdle earlier this month. Stock markets embrace the Fed’s “skip” idea while data simultaneously suggest that the economy and labour market aren’t cooling as rapidly as feared.

The latest NY Fed Survey of Consumer Expectations yesterday provided evidence for both Team Skip and Team Hike within the Fed. Inflation expectations declined at the short term horizon to their lowest level in two years (1y; 4.4% to 4.1%), while they increased slightly at the medium- (3y; 2.9% to 3%) and longer-term (5y; 2.6% to 2.7%) horizons. Labor market expectations were mixed as well with expected earnings growth declining (2.8% from 3%), and unemployment expectations and perceived job loss risk improving. Households’ perceptions and expectations for credit conditions and their own financial situations all deteriorated slightly.

The US Treasury started its mid-month refinancing operation with an average $40bn 3-yr Note auction (awarded almost bang in line with 1:00 PM WI, bid cover in line with previous six auctions at 2.7) and a more difficult $32bn 10-yr Note sale (stopped 1.5 bps through WI with average bid cover at 2.36). The NY Fed Survey and the auctions left no traces on yesterday’s intraday trading pattern which saw US Treasuries advance in lockstep with stocks.

US yields fell slightly less than 2 bps at the front end of the curve while ending flat at the very long end. German Bunds underperformed with daily yield changes varying between -0.7 bps (2-yr) and +3.4 bps (30-yr). EUR/USD closed unchanged after testing last week’s top at EUR/USD 1.0787. EUR/GBP bounced off 0.8547 support going into this week’s key data releases to close a tad below 0.86. Labour market data came in extremely hot this morning with more wage pressure, stronger employment growth and a lower unemployment rate. Sterling rises on the figures.

US May CPI inflation is the main dish today. Consensus expects a 0.1% M/M headline increase with the Y/Y-figure declining further from 4.9% to 4.1% mainly driven by energy and base effects. These will continue to play a role in June as well. Core inflation is expected to rise by 0.4% M/M and 5.2% Y/Y (from 5.5% Y/Y). Anything bar an outsized upward surprise should seal the Fed’s skip strategy. Anything in line with or below forecasts will pull US yields and the dollar lower going into tomorrow’s meeting with some still betting on a rate hike. Nearby technical resistance levels (eg 4.64% for the 2y-yield) come into play as well. Risk sentiment should remain constructive. The US Treasury’s $18bn 30-yr bond sale is a wildcard for trading.

The People’s Bank of China (PBOC) today unexpectedly cut its short-term policy interest rate. It reduced the seven day reverse repo rate from 2% to 1.9%. It was the first policy rate cut since August of last year. The rate cut is seen as an indication that the PBOC is acknowledging that the post-pandemic recovery needs additional support. China releases a series of key economic data, including retail sales, investment statistics, production data and money supply data later this week. Markets now also look out for a potential cut in the rate on the 1 year medium term Lending facility on Thursday. The yuan weakened further this morning.