Stable US CPI in May Foreshadows Federal Reserve Decision.

According to forecasts, the US Consumer Price Index will increase 3.4% YoY in May, continuing its April trend.

It is anticipated that annual core CPI inflation will gradually decline, from 3.6% in April to 3.5% in May.

The US dollar's value and the anticipation for a September rate cut could be affected by the inflation figures.

On Wednesday at 6 PM, the Bureau of Labour Statistics (BLS) will release the much awaited Consumer Price Index (CPI) inflation data for the United States (US) for the month of May.

The US dollar is poised for severe volatility since the market's pricing of the Federal Reserve's (Fed) September interest rate cut expectations might be greatly impacted by any shocks from the US inflation data.

*What’s in store for the upcoming CPI data report?*

According to the CPI, US inflation is predicted to rise at the same 3.4% annual rate in May as it did in April. The core CPI inflation rate for the same period, which does not include volatile food and energy costs, is 3.5%, somewhat less than the 3.6% rate that was observed in April.

In the meantime, the US CPI is predicted to increase by 0.1% MoM in May after growing by 0.3% in April. Over the course of May, the core CPI inflation rate is probably going to stay constant at 0.3%.

Federal Reserve Chairman Jerome Powell participated in a moderate discussion at the Foreign Bankers' Association's Annual General Meeting in Amsterdam, only one day before the release of the April CPI data. Regarding the outlook for interest rates, Powell adopted a more dovish attitude, stating that "confidence in inflation moving back down is lower than it was." My level of confidence in that has decreased."

Powell's remarks were supported by the headline and core CPI inflation figures that decreased in April. Since then, the market's price of a Fed interest rate cut in September has gained support from a plethora of US business activity and job data.

That changed, though, after a strong US labour market report on Friday revealed that, in contrast to expectations of an 185K job gain, Nonfarm Payrolls added 272K positions last month. In contrast to the 4% increase in April, Average Hourly Earnings increased by 4.1% during the same period, above forecasts of a 3.9% growth.

The statistics moderated expectations for a September Fed rate cut by showing ongoing tightness in the US labour market conditions and an increase in wage inflation. According to the CME Group's FedWatch Tool, markets reduced their bets on a 25 basis points (bps) rate drop in September to 43% from around 55% before the news. They are now pricing about an equal chance of two rate cuts by the end of 2024 compared to roughly a 68% chance observed before the NFP release, per Reuters.

Previewing the May inflation report, we anticipate that core inflation again slowed to a "soft" 0.3% m/m rate in May, following a stronger 0.29% advance in April. This is according to the CPI report that is released next week. TD Securities analysts stated in a weekly report that the headline probably increased by a weaker 0.1% m/m as energy prices probably offered significant assistance.

The analysts said that there are greater chances of a dovish surprise to a rounded 0.2% increase based on our unrounded core CPI projection of 0.26% m/m.

Author: Prayas Sarkar, MBA ( Finance )

Diploma - Post Graduate Programme of Financial Markets

Certified - NISM V, NCFM Capital Market Dealer Module