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Is US CPI set to slow?

inflation graph

After a strong start yesterday, European markets gave back a lot of their early gains, although they still managed to finish the day modestly higher.

The ebb and flow of US markets continues to be the main driver, with the S&P500 making a new one year low at 3,958, before recovering back above 4,000, to eke out a modest gain, while the Nasdaq 100 closed higher, and the Dow closed lower.

This slightly more positive turn should help markets here in Europe open modestly higher this morning.

We’ve seen plenty of speculation as to whether we’re close to seeing a plateau in short term inflationary pressures over the past few days, having seen bond yields slip back sharply in the last day or so.

This seems somewhat premature, with some investors looking for clues from this week’s inflation numbers starting with today’s China CPI and PPI numbers for April, as well as today’s Germany and US CPI numbers.

This seems a somewhat dubious comparison given that Chinese PPI inflation has been heading lower since peaking last October at 13.5%, while CPI has remained steady at around 1.5%.

The decline in China PPI has been primarily because of government intervention to stem big increases in commodity prices, as well as the shutdown of some key industries to save power at the end of last year, and for Lunar New Year at the beginning of this year.

These limitations on economic activity, along with attempts to keep the Omicron variant at bay have served to keep price pressures suppressed, on both the PPI measure, but CPI as well.

As such, trying to gain a steer on how Chinese inflation might filter into the global economy is unlikely to offer much in the way of clues given the various restrictions being imposed across the country to combat the spread of Omicron.

This morning’s inflation numbers only serve to reinforce that difficulty, as April PPI in China fell from 8.3% to 7.8%, while CPI jumped to its highest level this year from 1.5% to 1.8%, but is still below the levels it was at the end of last year.

April CPI in Germany is expected to be confirmed at 7.4%, reinforcing the calls yesterday from Bundesbank President Joachim Nagel who said he would be pushing for the ECB to hike rates at its July meeting, a call he is expected to repeat later today at a capital markets day in Berlin. It will be interesting to note how his remarks will be received by ECB President Christine Lagarde when she speaks later today in Slovenia.

We finish up with US CPI for April, in the wake of last week’s decision by the Federal Reserve to raise rates by 50bp. Whatever today’s number comes in at, there seems little prospect that we won’t see another 50bps rate rise in June, even if the numbers come in below expectations.

This seems likely given Powell’s recent comments about inflation being too high, which were reinforced by Loretta Mester yesterday in remarks that suggested that the Fed would run the risk of tipping the economy into recession to bring inflation lower.

In March, US CPI rose by 8.5%, slightly above expectations, while core prices rose by 6.5%, slightly below expectations, in a sign that inflation pressures could well be close to easing, although this remains unclear given that subsequently PPI in March rose to 11.2% and another record high, as core prices rose to 9.2%.

With ISM prices paid data in both services and manufacturing jumping higher in April, any signs of a peak in headline inflation still seems some way off, with US 10-year yields rising to 3.2% earlier this week, although we have since slipped back. Today’s headline CPI numbers could go some way to determining whether we’ve started to see a plateauing in inflationary pressures, or whether we get a further lift in inflation expectations.

The Federal Reserve has already said it will go for successive 50bps rate hikes at the next two meetings, as well as announcing the process of balance sheet reduction, starting next month at $47.5bn a month, increasing to $95bn a month by September. Expectations are for headline CPI to slip back to 8.1%, and core prices to 6.1%.

EUR/USD – the support at 1.0470 continues to hold for now. A move below argues for a move towards the 2017 lows at 1.0340. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.   

GBP/USD – made a marginal new low at 1.2261 on Monday, and has recovered a little, but there’s little inclination to rally. A break below 1.2250 opening up the 1.2000 area. We need to see a recovery back above 1.2470 to open up the 1.2600 area.

EUR/GBP – continues to trade below the 0.8600 area, and December highs for now, with a break targeting the 0.8660 area. Support lies back at the 0.8470/80 area.

USD/JPY – made a marginal new 20 year high at 131.35, earlier this before slipping back to 129.70. Still remains on track for a move towards 135.00. Need to see a break of 131.50 for this to unfold. Support now back at the lows last week at 128.60.


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