US CPI: Staying on the course - TDS

The US May CPI report matched market expectations, with the headline measure increasing 0.2% m/m (0.209% unrounded), which raised the annual inflation rate to 2.8% from 2.5% in April - the highest pace since 2011, notes the analysis team at TDS.

Key Quotes

“Core CPI also matched market expectations, rising 0.2% m/m (0.171% unrounded, hence on the softer side). The annual core inflation rate inched up to 2.2% from 2.1% in the prior month. Core goods remained weak — declining -0.1% on the month — and deflating at an annual rate of -0.3%. Recent US dollar strength may be further limiting already weak pass-through effects from prior USD depreciation.”

“For the Fed, today's report confirms that inflation continues to improve, helping to lift core PCE inflation toward the Fed's 2% target. We expect the Fed to hike in June and then continue with a gradual pace of rate hikes over the next few years.”

“FX Market Implications

FX markets could not be bothered with this CPI report printing on the screws. More importantly, focus remains situated on this week's G3 central bank meetings with the ECB the elephant in the room. Ahead of that, the Fed is widely expected to a deliver a hike but with the median dot-plots to remain unchanged and the Fed to reaffirm a tolerance for a modest inflation overshoot suggests a very high hurdle for the rates market to price in additional tightening than what is already implied. This leaves the USD vulnerable to a partial retracement from here but ultimately dependent on the ECB on Thursday. Against this backdrop, USDJPY's flirtation above the 200-dma near 110.20 looks precarious to us ahead of the Fed.”