US inflation report could temper June cut expectations

European markets have kicked off the day on a solid footing, with stocks throughout the region rebounding despite the potential US-focused volatility ahead of today’s inflation data and FOMC minutes. Nonetheless, there is grounds for optimism in Europe, with tomorrow’s ECB meeting expected to see Lagarde tout a more accommodative stance, signalling the beginning of the hotly anticipated period of rate cuts that should gradually normalise rates over the coming years.

Central banks have stepped into the limelight today, with the RBNZ rate decision seen overnight opening the pathway for the Bank of Canada and ECB to follow suit. The RBNZ decision to keep rates steady came as no surprise, and their steadfast approach to driving down inflation stands them in stark contrast to those banks signalling potential action in the coming months. Instead, markets are looking for the first New Zealand rate cut to come around August. The Bank of Canada take centre stage today, with markets looking for signals over a potential rate cut in June. With the ECB, BoE, BoC, and Fed all predicted to cut rates in June, the upcoming rate decisions appear to represent opportunities to align markets with their thinking rather than making any changes this time around.

US inflation looks to provide a significant hurdle for markets today, with expectations of an uptick in headline CPI signalling the growing likeliness that we will see the Fed push back against expectations of a June rate cut. The optimists will look towards the likely decline in core inflation as a signal that underlying price pressures continue to ease, with a decline from 3.8% to 3.7% expected. However, the Federal Reserve are clearly under no pressure to act immediately, and the recent rise in energy prices do pose a significant risk that the gains seen today may not be a one-off. Between a strong US economy, strong jobs, and elevated inflation rate, there is little surprise that we are seeing markets gradually temper their expectations for a June rate cut from the Fed.