Week ahead – US CPI to take centre stage as Fed rate cut bets gather pace [Video]

• US inflation may edge up in May but unlikely to dent Fed rate cut bets.

• Focus also on trade negotiations and US appeals court tariff decision.

• Chinese trade data eyed amid tariff war.

• UK employment and GDP also on the agenda.

 

Will US CPI add to Fed rate cut hopes?

Expectations that the Federal Reserve may cut interest rates by more than 50 basis points received a boost over the past week following a weak batch of economic indicators that pointed to a slowing US economy. The first signs of cracks from President Trump’s global trade war appear to be forming within the labour market, manufacturing, consumer spending as well as the broader services sector.

However, after the recent months’ declines in the key inflation metrics, investors are hoping that the Fed will not hesitate to cut rates now that the economy is possibly stumbling. Yet, there’s also a case to remain on pause for a while longer, at least until after the July 9 deadline for reciprocal tariffs where there should be more clarity about potential trade deals.

With inflation still hovering above the Fed’s 2% target, policymakers may not want to make the mistake of lowering borrowing costs prematurely, as a fresh flareup in trade tensions cannot be ruled out at this stage.

Wednesday’s CPI report will put the improved rate cut optimism to the test as it might show a stalling in the recent disinflation trend. According to the Cleveland Fed’s Nowcast model, headline CPI is estimated at 2.4% y/y in May, up from 2.3% in the prior month, while core CPI is projected to stay unchanged at 2.8% y/y.

Producer prices for the same month will follow on Thursday and will also be important in gauging underlying price pressures. Wrapping up the week will be the University of Michigan’s closely watched preliminary consumer sentiment survey, which includes consumer inflation expectations.

Any softness in the incoming data would likely further bolster rate cut bets, adding to the US dollar’s woes, but shares on Wall Street would probably cheer a downside surprise and head higher.

Tariff ruling and trade deals might also set market tone

However, it’s not going to be just inflation data driving sentiment next week. The US Court of Appeals could decide in the coming days whether to permanently overturn the US International Court’s ruling to block Trump’s reciprocal tariffs. The appeals court will have heard from both sides by June 9, but in either outcome, the case could still end up in the Supreme Court, delaying a final ruling on the matter.

Still, should in the meantime the appeals court rule in favour of the Trump administration, it won’t change the status quo and the market impact will be negligible. But should it side with the lower court that the reciprocal tariffs are unlawful, there could be a limited boost to risk appetite.

Investors will also be keeping an eye on any developments in the trade negotiations as it’s not just the US President that’s getting impatient about the slow progress. Doubts are creeping into the markets about how quickly the US will be able to reach trade agreements with its main trading partners, as there’s just one month left until the 90-day pause on reciprocal tariffs expires on July 9.

Japan and India remain the most likely countries to next reach a trade deal with the White House, especially Japan, which is hoping to conclude talks before Prime Minister Ishiba meets with Trump on the sidelines of the G7 summit in Canada that starts on June 15. However, a surprise deal is also possible with the G7 hosts, amid reports that Canadian Prime Minister Carney has been in direct talks with Trump to settle the trade row between the two countries.

Tracking the fallout of the US-China tariff war

But as far as trade talks with China are concerned, there is some ambiguity about how much progress is being made despite the call this week between Presidents Trump and Xi. At this point, the only real progress is that there is an open dialogue between Washington and Beijing and that Trump will soon travel to China on a state visit. But an actual deal could be months away, with more setbacks likely until there is a final agreement, and this can only mean more bumps on the road for markets.

Next week’s trade figures out of China could slightly smoothen the ride, however, as the truce struck with the US on May 12 to temporarily lower the tariffs on each other possibly lifted exports during the month. Though, it might be difficult to get a clear picture given that the tariff relief came during the middle of the month.

The May trade data is out on Monday alongside the consumer and producer price indices for the same period.

Equities and the Australian dollar are likely to rise the most from a strong bounce in Chinese exports and imports.

Pound aims high, might shrug off UK data

Over in the United Kingdom, Prime Minister Keir Starmer’s success in being the only leader to sign a preliminary trade pact with America hasn’t earned him much praise on his home turf. Starmer’s Labour government is under fire by both Labour MPs as well as voters for making steep cuts to some benefits, not doing enough to stimulate the economy and for not negotiating a better deal with Trump.

Financial markets are somewhat more impressed of his handling of the economy, as the pound is trading at more than three-year highs, testing the $1.36 handle.

Nevertheless, despite the UK economy defying the predictions of doom and gloom, there are some worries about the labour market. The government’s hike in employers’ national insurance contributions on top of the rise in minimum wage and demands of higher pay, has overburdened companies with higher costs.

The employment report for the three months to April will be watched on Tuesday for any signs of increased layoffs. The latest wage growth numbers will also be scrutinized as the very slow cooling in pay pressures is keeping the Bank of England on the cautious side when it comes to its readiness to cut rates.

There will be more data on Thursday with the release of the April GDP print, including the sectoral growth in services, manufacturing and overall industrial production.

Unless the jobs and GDP figures are very strong or very poor, reaction in the pound will probably be muted, with broader risk sentiment and the dollar’s own performance being bigger drivers.