FX Daily: All eyes on US CPI today
Looking for US inflation to peak
Group Research - Econs, Philip Wee11 May 2022
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Investors are keeping their fingers crossed for US inflation to peak. Bloomberg consensus expects today’s CPI inflation to ease, for the first time since August, to 8.1% YoY in April from 8.5% in March. Stripping out energy and food prices, core CPI is expected to slow to 6.0% from 6.5%. On a MoM basis, CPI is expected to slow to 0.2% from 1.2% from more stable energy prices. WTI crude oil prices closed below USD100 per barrel yesterday, down from its USD130 peak pm 7 March. In late March, the Biden administration reinstated tariff exemptions on some Chinese goods and is assessing whether to ease more of the Trump-era tariffs imposed on Chinese imports to help fight inflation. 

New York Fed President John Williams forecasts core PCE inflation easing from 5.2% YoY in March to 4% YoY this year and 2.5% next year. He supports frontloading two more 50 bps hikes to “expeditiously” lift the Fed Funds Rate to 2% in July, into his estimated 2% to 2.5% neutral range. Williams is confident that the Fed can lower inflation via a soft landing characterised by below-trend growth and an unemployment rate modestly above 3.5%. Last Friday, the jobless rate was unchanged at 3.6% in April. Advanced GDP growth slowed to 3.6% YoY in 1Q22 from 5.5% in 4Q21, still above the 2.2% average between the global financial crisis and the Covid recession.

Other Fed speakers, Christopher Waller (Minnesota) and Thomas Barkin (Richmond), also drove home the message that the Fed was not seeking a recession to cool prices. On Monday, the Fed’s semi-annual Financial Stability Report noted the decline in market liquidity since late 2021 from the increased volatility in commodity markets and the Fed’s tightening was not extreme as past episodes. Given the risks to the economy and financial markets posed the Ukraine war and rising rates, the Fed will endeavour to be data-dependent in adjusting policy according to circumstances.

Markets appear to be listening and see no urgency for the Fed to push for a larger 75 bps hike. The US Treasury 10Y yield has returned below 3% into Fed’s collective 2-3% neutral range cited by Fed Chair Jerome Powell at last week’s FOMC meeting. DXY has stabilized, mostly in a 103-104 range since 28 April. As witnessed on 4 May, a stock market recovery will need to be accompanied by a lower USD, especially given the drag on 1Q GDP from record trade deficits.

Quote of the day
“I do not pray for a lighter load, but for a stronger back.”
     Phillips Brooks

11 May in history
Imelda Marcos won election to Philippine House of Representatives in 2010.








Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]
 

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