It’s arguably the biggest data release on the calendar. US inflation data is published on Wednesday at 13.30 BST and will tell us whether price pressures are subsiding or still sticky.

What does this mean for traders

A slower pace of price increases will keep the good vibes in the market going. That means a bid for stocks and gold, but not USD. Stubborn inflation could bring back hike talk and hurt risky assets while giving USD a lift.

·       Headline inflation is expected to fall one-tenth to 3.4% from 3.5% in March.

·       The monthly headline CPI figure is seen ticking one-tenth lower to 0.3%.

·       The core monthly reading is forecast to drop to 0.3% from 0.4%.

·       Focus will be on the core print as this strips out volatile food and energy costs.

·       USD could react the strongest to softer data as it remains overbought.

The latest consumer price data out of the US is set to show a slowdown after a run of unexpected strength that kicked off 2024. US exceptionalism has seen the solid labour market endure for longer than many had thought, while a streak of hot inflation readings also confirmed that the economy was more robust.

But a softer than forecast NFP report for April, with benign wage growth figures, has brought some hope to Fed policymakers. They have echoed that view more or less recently, with Chair Powell hinting at the May FOMC meeting that policy was in a good place, even if he was mildly concerned about the lack of progress on price pressures. Certainly, rate setters want to see a number of months of progress on the disinflation trend to be confident of hitting the 2% target.

Detail of the report

PMI data points to prices coming in at a slower pace during April, but energy prices could support headline inflation. The heavily weighted shelter inflation should continue to shape the overall pace and direction of CPI. But going forward, slowing demand is likely to present further evidence of a gradual softening in prices across the economy.

Some economists have highlighted that the annual figures might benefit from favourable base effects in this week’s data. However, this won’t be seen again until August, so further progress on falling prices may prove tricky in the next few months.

Expectation for key figure

Most focus will be on the expected 0.3% month-on-month print in the core CPI reading, when the latest inflation numbers are released. This is generally deemed as still too high for the Fed as 0.2% m/m figures are required over a number of months to bring inflation back to the 2% target.

Money markets currently price in roughly just under two 25bp rate cuts for this year. The first move is likely to be done in September, with around a 62% chance of that taking place.

Market Reaction

Markets will obviously be wary of the recent hot streak in the price data.

Lower-than-expected data could hit the dollar and see the Dollar Index fall below support around 105. Stock market bulls might react with glee and head closer to all-time highs.

The flip side and a hotter report could see the greenback push higher while gold and equity markets get sold. 

The information has been prepared by Vantage UK as at 14th May 2024 and is subject to change thereafter. The information is provided for educational purposes only and doesn’t take into account your personal objectives, financial circumstances, or needs. It does not constitute investment advice. We encourage you to seek independent advice if necessary. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty is given as to the accuracy or completeness of any information contained within. This material may contain historical or past performance figures and should not be relied on. Furthermore estimates, forward-looking statements, and forecasts cannot be guaranteed.

SOURCE: CME FedWatch Tool