What is the probability that CPI will be so strong that the rate cut idea flies out the window?

Outlook

News from abroad includes GDP from Japan, expected to show more recovery, and Australia’s employment report, which tends to punch above its weight. So far this year, employment growth has been stellar and expectations are already forming that the RBA could be the first to declare victory and cut rates.

But in the end, we have only one question this week—what is the probability that CPI will be so strong that the rate cut idea flies out the window—again? Or the data is the same or only an inch better, taking the cut off the table for the whole year, or at least until November.

We get the NY Fed survey of inflation expectations today, PPI tomorrow but the data of the week is CPI on Wednesday. Hardly anything else matters although analysts will try to make hay of the retail sales straw.

Last time (March), headline CPI was 3.48% from 3.2% in Feb. Core CPI was 3.8% when 3.7% was forecast—and the same as the month before.

This time the consensus for April is 3.4% and core down to 3.6%. Neither number is anywhere close to the 2% target. Note that headline could easily be the same as the month before--depending on rounding.

Never mind that it’s not CPI or core CPI the Fed is looking at. The markets like CPI and will decide the rate cut outlook on the data. Never mind that if you exclude shelter, inflation looks a lot better. As Trading Economics writes, “The shelter index increased 5.7%, accounting for over sixty percent of the total 12-month increase in all items less food and energy index, the same rate as in February.”

We are not going back into the weeds of housing rents and home prices. In March, rent fell to 5.66% from 5.74%, but this is a far cry from falling enough to deliver a falling headline CPI. Similarly, services rose to 5.27% in March, actually higher than 4.95% in Feb. We would have to see huge declines in both measures in order for CPI to promote a sense of security in the rate-cut outlook. 

Therefore, it seems likely that the markets will be shocked! Shocked! That prices are still sticky and disinflation is not here, at least not yet. Yields and the dollar should go back up. Note that this would be consistent with the Univ Michigan consumer inflation expectations—they just don’t buy the story that inflation is fading. Consumers expect prices will rise 3.5% over the next year, the highest in six months and up from 3.2% in April, data Friday showed. For the longer term, 5-10 years, they see 3.1%.

The Fed heeds consumer surveys because expectations feed behavior—“prices are only going up, buy now to get ahead of it.”

Forecast: The market seriously wants to see either disinflation or a fat drop in growth or both, allowing the forecast to stay with the Sept rate cut. We don’t see how the numbers can be much of an improvement, if any, and there is a real chance we go back to” no  cut/hike maybe.” Sticky inflation, or stickier than expected, is a dollar tailwind, if the yields reflect it. We will likely stay consolidative and rangey until CPI is done and dusted.

Tidbit: Weirdly, Republicans expect more inflation than Dems.

Intervention Saga

The BoJ will buy a smaller amount of JGB’s, seen as a form of propping up yields and thus a weak form of intervention. Bloomberg has a story on how G10 currencies are starting to draw interest again, especially those in the carry trade, like the yen (and Swissie), alongside EM’s.

Reasons for the Fed to Cut Rates

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market.

Synchronize with the ECB (and Riksbank and SNB).

(Help the current White House).

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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