According to the Bureau of Labor Statistics (BLS), US CPI inflation came in as expected and exhibited a deceleration in consumer price inflation for both headline and core numbers year-on-year. We also saw a miss in US retail sales data – MoM: 0.0% versus 0.4% expected – which added to the dovish market reaction.

Year on year, headline inflation rose +3.4% in April, down from +3.5% in March (consensus: +3.4%), while core came in at +3.6%, which was also in line with consensus, but down from March’s reading of +3.8%. Month on month, headline rose at a slightly slower-than-expected pace at +0.3%, against +0.4% expected (and prior), and core inflation over the same period was in line with consensus at +0.3%, though down from +0.4% previous.

Rate pricing revealed a dovish reaction after the event, showing that we’re now working with around a 40% probability of a 25bp cut at the July meeting, which was approximately 30% before the release of the latest data. A total of 50bps of easing is now priced in for the year (two rate cuts).

FOMC – Wait and See

You will recall that the May FOMC meeting saw the Fed funds target rate remain unchanged at 5.25%-5.50% for a sixth successive meeting. The Rate Statement communicated a lack of progress on inflation and maintained the message of requiring greater confidence in the disinflation process before easing policy. Fed Chair Jerome Powell added that it would take the Fed longer than anticipated before reaching that level of confidence, though the Chief did note that his ‘personal forecast’ was that inflationary pressures would begin to subside again this year. Clearly, he was correct in the month of April!

The crux of the FOMC meeting was that the Fed remains in a good place with current policy, and we are far off talks of a rate hike. However, a rate cut is still not firmly on the table until progress in disinflation is observed.

Since the FOMC meeting, Powell’s comments have been echoed by his peers. Earlier in May, New York Fed president John Williams said that the Fed would eventually have to cut rates, ‘but for now, monetary policy is in a very good place’, though he provided no timeline for such cuts. Richmond Federal Reserve President Thomas Barkin commented that the current benchmark policy rate will be enough to get the job done but emphasised that inflation is likely to prove tougher than expected to control. Essentially, both officials, along with Minneapolis Fed president Neel Kashkari, Chicago Fed president Austan Goolsbee and Cleveland Fed President Loretta Mester, stress a higher-for-longer theme in rates and a rate increase is not something that is being actively discussed.

Markets Post US CPI

As you would expect, the US Dollar Index fell sharply lower in the immediate aftermath of the release. Ahead of the event, the FP Markets Research Team released a post looking at a potential breach of major support from 104.78 on a dovish reaction. This has indeed taken place, and we’re now testing the grip of support from 104.48.

US yields also dropped lower, with the benchmark 10-year yield falling to 4.35%, and spot gold (XAU/USD) rallied higher.

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