CPI inflation matched consensus in May. Markets lowered the odds of both June and July hikes after the CPI report. Economists at TD Securities
A June hike is still on the table
Headline printed 0.1% MoM, down from 0.4% in the month before. However, prices in the core segment stayed firm, advancing a still strong 0.4% MoM.
With inflation measures still not showing significant progress, we remain of the view that a final 25 bps Fed rate increase to 5.25%-5.50% remains on the table this week. In our view, if the hard data points to an economy that remains strong enough to make the Fed signal a likely rate hike for July, perhaps it is more optimal to go now.
We also acknowledge that the FOMC has likely entered a risk-management phase, with Fed officials turning more cautious after the rapid accumulation of rate hikes over the past year and rising uncertainty post-SVB collapse. With that said, if the Fed decides to 'skip' a June hike tomorrow, we think it will be hard-pressed to find convincing reasons behind the hard data published since the May FOMC meeting.
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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