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On-consensus inflation print puts Fed on course toward rate “skip”

US consumer inflation slowed as expected last month, giving the Federal Reserve room to skip a rate hike at tomorrow’s meeting. According to data published by the Bureau of Labor Statistics this morning, the headline consumer price index rose 4 percent in May from the same period last year, up 0.1 percent on a month-over-month basis. This was slightly below the 4.1 percent and 0.1 percent consensus estimates among economists polled by the major data providers ahead of the release.

With gasoline prices tumbling, energy costs slid 3.6 percent month-over-month, while the food index inched 0.2 percent higher. New vehicle prices fell -0.2 percent and used cars jumped 4.4 percent. Shelter costs climbed 0.6 percent – making up the biggest contributor to the headline increase.

With highly-volatile food and energy components excluded, core prices rose 5.3 percent year-over-year – gaining 0.4 percent over the prior month and directly aligning with consensus forecasts. 

From a broader perspective, disinflationary processes seem to be gaining traction: Chinese producer prices are coming down, global crude benchmarks are holding near levels last seen in 2021, and yesterday’s survey from the New York Fed showed year-ahead inflation expectations subsiding to 4.1 percent, well off their highs.

Equities are moving slightly higher and Treasury yields are softer as investors position for further loosening in the year ahead – but implied odds on a quarter-percentage point increase at the Fed’s July meeting look fairly stable relative to the 72-percent threshold reached before the release. The dollar is pushing lower against its major counterparts.

The British pound surged earlier this morning after a strong employment report raised the odds on rate hikes at each of the Bank of England’s next two meetings. According to the Office for National Statistics, private sector wage growth accelerated to 7.6 percent in the three months to April from the prior period’s 7.1 percent, smashing market consensus and topping the central bank’s own forecasts. Gilt yields shot up – and are now delivering the widest premium over US Treasuries since the global financial crisis – as terminal rate expectations rocketed higher. Markets now think policymakers will hike rates in June and August, with a pause seen coming in September at the earliest.

In stark contrast, the yuan is coming under renewed pressure after the People’s Bank of China unexpectedly cut its seven-day reverse repurchase rate, widening interest differentials against the dollar. The move comes after commercial banks were encouraged to cut rates last week, and could foreshadow more easing in the days ahead as policymakers work to prevent a deeper slowdown in the world’s second largest national economy. Data out on Thursday is expected to show retail sales, fixed asset investment, and industrial production weakening in May, suggesting that an early-year post-covid rebound is losing steam.

Today’s economic data cupboard is otherwise bare. Bank of England Governor Andrew Bailey and Treasury Secretary Yellen will make simultaneous appearances before political committees at 10 am. Tomorrow will bring a gross domestic product update from the UK, along with weekly US energy inventories, and the Fed decision.

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