US CPI lower than expected, while FOMC signals only one rate cut in 2024

In focus today

Today Norges Bank (NB) will publish the regional survey for Q2, where we expect that the respondents (corporates) will be somewhat more optimistic than in February. The aggregated production index for both the current (Q2) and the next quarter (Q3) will probably end up in the range of 0.2-0.3%, which will be somewhat higher than NB assumed in the PPR in March (0.0 % in Q2).

In Sweden, we get Prospera's big quarterly Q2 survey which includes not only inflation but also wage expectations, not least among social partners. However, all price/inflation expectations are more or less aligned around 2% at all horizons so it is unlikely to show any surprises.

In the US, May PPI is due for release today. In the evening, Fed's Williams moderates a discussion at the Economic Club of New York, potentially sharing some fresh views after the Fed's rate decision yesterday. 

In Japan, the policy board convenes in the Bank of Japan (BoJ) today and wraps up the meeting with a policy decision early Friday. We expect no rate change, but we do expect the BoJ to signal tapering of its bond purchases. BoJ has kept the bond purchase pace unchanged at about JPY6 trillion a month after ending negative rates and yield curve control in March. It is a natural next step to cut purchases and Governor Ueda has also communicated that this is a priority. We think the BoJ will move slowly ahead, and thus getting started now with small steps seems like a good way forward.

Economic and market news

What happened yesterday

In the US, consumer prices rose 3.3% y/y in May (Cons: 3.4%; Prior: 3.4%) and were unchanged in the seasonally adjusted monthly measure of the same. Likewise, core CPI came in lower than expected as well at 0.2%|3.4% m/m|y/y (Cons: 0.3%|3.5%; Prior: 0.3%|3.6%). This was a positive surprise for the Fed in its battle against inflation, since the 0.2% m/m core inflation print rhymes with Fed's 2% target. However, the print follows 4 months straight with higher price pressures, so there is still some way to go before we expect the Fed to be confident enough about inflation to start cutting rates. 10y US treasuries dropped around 15bp in the hours after the print. EUR/USD increased initially from 1.076 to around 1.083.

The Fed maintained its monetary policy unchanged as widely anticipated, keeping the interval for the Fed funds rate at 5.25-5.50%. The most important news is the change in the dots, which signalled delayed cuts, with median pencilling in only 1 reduction for 2024 (prev. 3) but 4 for both 2025 and 2026 (prev. 3), so 25 bp higher end of 2025 but unchanged end of 2026. 2024 core PCE forecast was adjusted to 2.8% (prev. 2.6%) while other forecasts were largely unchanged. UST yields retracted part of the earlier CPI-driven decline and USD regained strength. We make no changes to our Fed call and still expect two 25bp rate cuts this year (starting September) followed by four more in 2025.

In Europe, the EU BEV car tariffs on Chinese brands will be increased from 10% to around 20% depending on the brand. The weight of new cars in euro area HICP is 3.2%, but we do not expect this to affect inflation significantly - and thereby ECB policy rates. The Chinese government urged the EU to reconsider the tariffs on Chinese electric vehicles overnight. We see it as most likely that China will not escalate this to a trade war. China is already pressured on the trade front with the US, so they need a tolerable relationship with the EU.

ECB Vice President De Guindos spoke about monetary policy, where he stated that the ECB should move very slowly when reducing interest rates due to continued high uncertainty about the inflation outlook. De Guindos stated that he was very certain that inflation will eventually fall to 2%. However, the next few months will likely be bumpy while service inflation remains a cause for caution, he added. We still expect the next rate cut to come at the final meeting of 2024 in December.

In France, president Macron said that he would not resign if his party suffered a poor result in the upcoming snap election in June.

In the UK, GDP was unchanged in April compared to March as expected, sending the economy back in low growth territory after a strong first three months in 2024. Financial markets showed little reaction to the print, while markets still see it as highly unlikely that we will see a rate cut at next week's policy meeting.

Market movements

Equities: Global equities saw a significant rise yesterday, not due to robust demand data, but rather softer-than-expected CPI data from the US. While it superficially appeared as a classic risk-on day with equities rising across regions and cyclicals outperforming, value still underperformed growth by 1% as yields dropped like a stone. Hence, this shows how important inflation still is for investors and we cannot fully allow ourselves to think about a negative correlation between bonds and equities. Part of the rotation yesterday also relates to the high and still growing appetite for tech stocks, which is also evident in today's futures where tech is leading significantly. In the US yesterday, Dow fell by 0.1%, while S&P 500 rose by 0.9%, Nasdaq by 1.5%, and Russell 2000 by 1.6%. Asian markets are mostly higher this morning, with (again) a noticeable appetite for tech in South Korea and Taiwan leading the advances. European futures are lower while US futures are higher this morning.

FI: Yields rose on the back of the slightly hawkish revisions to the FOM'’s dots, though the move was not sufficient to counterbalance the strong market reaction following the soft CPI figures. The market pricing of cuts this year dropped from 50bp to 45bp in response to the statement/SEP release, and Powell managed to maintain that level throughout the press conference. 10Y UST yields are trading 8bp lower relative to yesterday morning, while the 10Y Bund yield is down 9bp. Peripherals saw big tailwinds with 10Y BTP yields declining 15bp through the day. The Bund ASW-spread widened for the third consecutive day with the level now trading slightly above 29bp.

FX: EUR/USD bounced back yesterday after US CPI inflation was lower than expected. That further spurred a rally in Scandi currencies where EUR/SEK fell briefly below 11.20. JPY also found some relief - USD/JPY dipped below 156.