Inflation: Slowing momentum, but mixed details remain open to interpretation
Headline inflation in the US has seen a substantial slowdown to 4.0% YoY from 4.9% YoY in April. The core, however, was slightly higher than expectations at 5.3% YoY (exp. 5.2%; prev. 5.5%) but stayed in-line on a MoM basis coming in at 0.4% (exp. 0.4%; prev. +0.4%). Clearly, this print offers a read for every policymaker, whatever their policy preference may be. This is why a pause at the June meeting still remains the most likely outcome, which would be an extension of the Goldilocks we remain locked in.
For those who tend to read this inflation release as dovish, clearly the core measure remained underpinned mainly by shelter and used car prices. Reports have recently suggested that rental prices are sliding in the US, primarily on the West Coast. According to a report from Redfin, the median rent in the US was $1,995 in May, dropping 0.6% YoY. This could start to weigh on shelter costs. Meanwhile, Mannheim used car auctions and new vehicle prices are also on a decline, suggesting little scope for these two components to continue to push core inflation higher in the coming months.
But from a hawkish person’s standpoint, we can argue that the decline in headline inflation was mainly energy driven and thus extremely fragile. Any reversal in energy prices could bring back the ugly price pressures that we saw last year. Therefore, taking comfort in this downtrend of inflation may be premature.
FOMC: A data-dependent approach may not be enough
The most likely set up going into the Fed meeting remains to be one of a “hawkish hold”. No doubt there are still reasons for the Fed to hike rates – considering the labor market strength or also the easing financial conditions given the pace of gains in equities. But the Fed usually prepares the market for its outcomes and lack of WSJ articles on why a hike may be considered suggests a pause is still warranted.
But the bigger question is then on whether we will get the next rate hike in July? It is difficult to see what can bring that if inflation softens further in June unless labor and wage data surprises considerably to the upside. But recalling the signals that we got from the retail sector earnings in the first quarter, there could be further concerns on consumers pulling back spending which would further erode the chance of another rate hike.
Dovish interpretations of today’s meeting could come from economic projections. If the growth forecast is adjusted higher with banking sector and debt ceiling risks now on the backburner, while inflation forecasts are adjusted lower given the recent trend. These will need to be balanced with enough hawkish commentaries to keep a July rate hike in play. Any dissenting votes at today’s decision will be worth monitoring as well. Members like Lorie Logan, Neel Kashkari, Christopher Waller and Michelle Bowman have been voicing hawkish sentiments. But a pure data-dependent approach from here will do little to cut short the equity rally.