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US inflation slows, providing lift to global asset prices

With the Ukraine energy shock falling out of year-over-year calculations and goods price growth continuing its descent, US consumer inflation slowed slightly more than expected last month. According to data published by the Bureau of Labor Statistics this morning, the headline consumer price index rose 4.9 percent in April from the same period last year, up 0.4 percent on a month-over-month basis. This was slightly below the 5.0 percent consensus estimate among economists polled by the major data providers ahead of the release.

Energy costs climbed 0.6 percent month-over-month, while the food index remained unchanged. New vehicles fell by -0.2 percent more expensive, while used cars jumped 4.4 percent, and shelter costs increased 0.4 percent after rising 0.6 percent in March.

With highly-volatile food and energy components excluded, core prices rose 5.5 percent year-over-year – gaining 0.4 percent over the prior month, and roughly in line with market expectations. The so-called “supercore” measure – which represents core services excluding primary residence rent and owner’s equivalent rent and is closely watched by Fed officials – rose just 0.1 percent after posting a 0.4 percent increase in the prior month.

The dollar is tumbling against its major counterparts, front-end Treasury yields are down, and equity futures are moving higher as investors reappraise the odds on rate cuts from the Fed later this year. But when set against a slew of recent data releases pointing to a gradual slowdown in the economy, we think today’s numbers should reinforce expectations for a prolonged plateau in policy rates – the central bank shouldn’t feel the need to ratchet rates higher amid a broader tightening in credit conditions, and is equally unlikely begin cutting aggressively while inflation remains stubbornly high.

Another inflation update will land before the Fed’s June meeting, reducing the importance of today’s number, and knee jerk post-release reactions have tended to fade relatively swiftly in recent months, suggesting that market participants won’t have long to trade the print anyway.

Both of the major global oil benchmarks remain roughly 1 percent weaker after reports suggested that the American Petroleum Institute’s US inventory measure had risen by 3.6 million barrels last week. Prices found support earlier in the week when the Biden administration said it would begin replenishing the Strategic Petroleum Reserve after completing maintenance work later this year – but major ambiguities around timing and volumes have hindered the rally’s strength in the last day. Markets generally expect the demand-supply balance to move in a tighter direction through the second half of the year, but major questions remain around the strength of Chinese demand and the outlook for global growth.

Yesterday’s meeting between President Biden and Congressional leaders failed to result in any meaningful progress toward resolving the debt ceiling impasse, with both sides appearing to rule out a short-term borrowing extension. Although signs of stress are evident in short-end Treasury markets, we’re not seeing evidence of the same in currencies – the volatility term structure remains relatively unkinked across most major pairs, and no clear-cut directional trading narrative has emerged in the run-up to the deadline. But if past episodes are any guide, leaders are unlikely to reach a deal before market worry rises enough to focus minds – and (in our view) that process could provide lift to the dollar.

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