US CPI Report This Week Will Reveal What Fed Will Do In June

May 8, 2023

| Fullerton Markets

US CPI Report This Week Will Reveal What Fed Will Do In June">

Investor attention this week turns to April’s consumer price index out Wednesday, followed by the producer price index on Thursday. Financial markets are hoping that it continues to remain subdued. Both reports could help analysts decipher the direction of the more stubborn crevices of the economy where inflation remains unchanged.

The core consumer price index, which excludes food and energy, probably increased by 5.5% in April from a year ago after a 5.6% increase a month earlier. The core rate has hovered in a 5.5% to 5.7% range for the past four months, underscoring the sticky nature of inflation. Wednesday’s report will be the first of two CPI releases Fed policymakers will have in hand before their June rate decision.

While progress in beating back inflation has been slow, the Fed has to consider the recent strain at regional banks and the sum of its yearlong hiking effort on the economy, where rate increases work with a lag.

Aside from the CPI, data on prices paid to producers will be released on Thursday. Economists project a firming in cost pressures for April compared with a month earlier. The upshot is that the figures will indicate the downtrend in goods prices may prove bumpy.

Jerome Powell said at the May FOMC meeting that rates may be sufficiently restrictive', but he needs more time to observe developments. However, there may be some good news in service sectors, such as the monthly pace of primary-rent and owners-equivalent-rent inflation rising slightly from March. We think primary-residential rents and owners-equivalent rents will both rise 0.6% month on month and on a year-over-year basis, rents will continue growing until late spring. While the April CPI report won’t be reassuring, it won’t jolt Fed officials into signaling another rate hike in June, given their expectation that the full disinflationary impact from tightened credit conditions has yet to appear.

Following last week’s rate decision from the Federal Reserve, traders are pricing in just a 9% chance for a hike at the central bank’s next policy meeting, according to CME’s FedWatch tool.

Fresh fears over a recession-inducing credit crunch are spurring bond bulls to ramp up bets that the Federal Reserve will embark on the most abrupt policy shift in almost four decades.

Just minutes after Wednesday’s Federal Reserve interest-rate hike, Wall Street was shaken by the Federal Reserve's interest-rate hike, with traders betting on future rate cuts due to regional bank turmoil. At their most anxious, markets priced in a policy about-face as soon as in July.

US employment data released Friday tempered that view, and next week’s inflation reports are expected to show scant progress toward the Fed’s 2% target. Yet critical barometers of economic health, which traders have largely ignored for years, are cause for concern. The Fed’s quarterly senior loan officers survey is one. Others include a gauge of small-business sentiment and the use of central-bank emergency facilities.