US inflation and Fed meeting today
The euro remained under pressure yesterday amid the continuing political turmoil in France, including speculation (subsequently denied) of President Macron’s imminent resignation. EURGBP traded down to an intra-day low of around £0.8420 and is just marginally firmer (£0.8430) this morning. EURUSD is only slightly off yesterday’s lows as well, at $1.0740, while the pound is trading at $1.2740 against the dollar, ahead of the May CPI inflation report and Fed meeting in the US later today.
European equity markets had another poor session, again led by a decline in in France, shedding almost 1%, though US stocks managed to reverse earlier losses to end in positive territory in the case of the S&P 500 and Nasdaq (the Dow Jones closed slightly lower). In bond markets, French and Italian 10-year yields finished flat on the day, reversing an initial spike in yields, while equivalent German yields closed slightly lower, as did US yields.
Data released in the UK earlier this morning show GDP was flat in April (slightly better than the consensus forecast for a decline of 0.1%), with an increase in output in the services sector offset by declines in manufacturing and construction. GDP was still well up over the three months to April though, by 0.7% on the three months to January, and was 0.4% higher than in the corresponding period in 2023.
Today’s CPI report in the US will be released shortly before the conclusion of the Fed’s monetary policy meeting. The consensus forecast sees headline inflation remaining at 3.4% in May, while the core rate is expected to have fallen for a second consecutive month to 3.5% from 3.6% in April. The latter would certainly help to reassure the Fed, but probably wouldn’t be enough to alter the position the Fed has maintained since March, which is that it doesn’t expect to lower interest rates until it has gained greater confidence that inflation is headed sustainably towards 2%. In this regard, the Fed’s updated “dot plot” will be of interest, specifically whether it still continues to point to 75bps of rate cuts this year, or is lowered to something closer to the 35bps the market expects over the September-December period.