Week ahead: US CPI inflation at the forefront of the macro space

In addition to ongoing US trade tariff developments, the key macroeconomic print to watch this week will be the June US CPI inflation data (Consumer Price Index). This follows the better-than-expected June US jobs report, which saw unemployment fall to 4.1% – albeit influenced by a drop in the labour force – and job growth rise to 147,000. However, I must add that the job gains were largely driven by government employment.

Undoubtedly, as I am sure you will agree, investors remain complacent right now, and it is easy to see why. Despite some ‘cracks’, US hard data remains largely unaffected at this point. There has been a limited impact on initial jobless claims (despite continued claims rising, which suggests it is now harder to find a job), and, as shown above, job data is holding up. Furthermore, while inflation has risen, it is not yet sufficient to warrant concern, and retail sales have also remained relatively stable.

While the US economy is starting to show signs of deterioration, I still believe it is too early to determine the impact of tariffs on the economy at this point, and that is unlikely to change with the upcoming June data. Many desks have noted that they are keeping a close eye on subsequent months, where they expect to see a broader impact of tariffs.

Modest uptick in US inflation expected

Economists expect to see a moderate increase in US price pressures in the June report, which will be released on Tuesday at 12:30 pm GMT. At the headline year-on-year (YY) level, the market’s median estimate currently suggests inflation rose by 2.6% from 2.4% in May (estimate distribution between 2.7% and 2.4%), while excluding food and energy items, the YY core measure is forecast to have increased to 3.0%, up from 2.8%. Month-on-month (MM), inflation is forecast to rise by 0.3%, up from 0.1% at both the headline and core levels.

However, while some tariff impact will likely be evident in the June data, particularly on tariff-sensitive goods, such as apparel, it will unlikely be sufficient enough to move the US Federal Reserve (Fed) to act this month. Despite a ‘couple’ of Committee members being open to a rate cut at the next meeting, according to 17-18 June Fed meeting minutes, most of the Committee are cautious.

The recent Fed meeting minutes were interesting in that they emphasised the division seen in the previous meeting, with one half of the camp focusing on possible one-time price increases, and the other side looking more to a longer-term inflationary impact. Of course, the former will be more open to cutting rates, while the latter will want to keep rates unchanged.

As of writing, markets have assigned a 93% chance that the Fed will leave the funds target range on hold at 4.25% – 4.50% at the end of this month, with 18 basis points (bps) of easing priced in for September, 32 bps for October, and 51 bps for the year end – so two rate cuts expected for the year. This is consistent with the latest Fed projections.

Should the June data report higher-than-expected inflation, exceeding the upper estimate range, this could prompt a sell-off in US Treasuries and increase demand for the US dollar (USD) this week. A USD bid could also be emphasised on the back of the USD being overstretched to the downside in terms of COT positioning (Commitment of Traders), as traders unwind some of those short positions. Conversely, if data show lower-than-expected inflation this week, it will likely trigger a downside move in the USD.

Additional risk events to note this week:

Tuesday 15 July:

• Canadian YY CPI inflation rate for June at 12:30 pm GMT
• Early estimates indicate that headline CPI inflation rose by 1.9% in June, up from 1.7% in May. This follows the Bank of Canada holding its overnight rate steady at 2.75%, with markets now pricing in one more 25-bp rate cut this year.

• Wednesday 16 July:

• UK YY CPI inflation rate for June at 6:00 am GMT
• Early forecasts indicate that inflation has risen to 3.5% in June, up from 3.4% in May. This follows the Bank of England’s 6-3 vote split, which signals that a 25-bp rate cut is potentially on the table for August.
• US PPI inflation rate (Producer Price Index) for June at 12:30 pm GMT
• Early estimates suggest that YY US producer prices have eased to 2.5% in June, following a 2.6% rise in May.

Thursday 17 July:

• UK employment data for May at 6:00 am GMT
• The May unemployment rate is expected to have remained unchanged at 4.6%, with wages – both regular and including bonuses – anticipated to have slowed in the three months to May.
• US MM retail sales data for June at 12:30 pm GMT
• As a key gauge of consumer spending, the June US retail sales data will be closely watched, with expectations of a 0.1% gain following a 0.9% decline in May.