Dollar lower post US inflation data
Yesterday’s CPI data in the US was broadly in line with expectations, with headline and core inflation both nudging down in April. The data clearly came as a relief to markets, following a string of stronger than expected inflation readings recently, and will reassure the Fed that inflation is still heading in the right direction, which in turn should allow it to cut interest rates later this year. Stocks rallied and bond yields fell post the data, while the dollar lost ground. The latter is trading at around $1.0880 and $1.2680 vis-à-vis the euro and sterling this morning, with the euro-sterling cross at around 85.8p.
US government 2- and 10-year bond yields both closed about 10bps lower yesterday as the market priced in a greater chance that a first Fed rate cut will come in September (now seen at around 85%), with similar declines in German and UK yields. In equity markets, the S&P 500 closed at a new record high after gaining more than 1%, while European stocks added around half a percent.
Regarding the US inflation data, the annual rates of headline and core CPI inflation dipped to 3.4% and 3.6% respectively in April from 3.5% and 3.8% in March. Within core, goods deflation intensified last month to -1.3%, while services inflation was only marginally lower at 5.3% (from 5.4%). On a monthly basis, core prices rose by 0.29%, after an increase of 0.36% in March and +0.37% a month on average in Q1. Separately, the value of retail sales was flat in April, weaker than the 0.4% gain expected, following a 0.6% increase in March (revised from +0.7%).
In response to the inflation numbers, Fed member Goolsbee said they showed “some improvement from last time, pretty much what we expected, but (the monthly increases) are still higher than over the second half of last year, so there’s still room for improvement.”
Employment in the Euro area rose by 0.3% in the first quarter of this year, bringing the increase over the past year to 1% despite GDP growth stagnating over most of this period. GDP did increase in the first quarter though, also by 0.3%, and the European Commission expects full-year growth of 0.8% in 2024 according its latest forecasts published yesterday (up from 0.4% in 2023), strengthening to 1.4% next year.
Economic data due today include industrial production, housing starts and import prices in the US, while a number of Fed and ECB members are scheduled to speak over the course of the day. The US inflation data though have probably set the tone in markets for the next while.