US CPI: Putting a September Fed Rate Cut Back in Play US CPI: Putting a September Fed Rate Cut Back in Play US CPI: Putting a September Fed Rate Cut Back in Play

US CPI: Putting a September Fed Rate Cut Back in Play

Macro 4 minutes to read
Charu Chanana

Head of FX Strategy

Key points:

  • US April CPI brought relief for market after three consecutive months of upside surprises.
  • While there are positive signs, significant challenges remain, and the Federal Reserve's ongoing battle with inflation is not yet over.
  • Furthermore, the US economy is showing signs of slowdown, with weaker data including lower GDP growth, contractionary PMIs, and subdued consumer confidence.
  • There are early signs that labor market is also softening, with slower job creation and easing demand for workers, suggesting potential headwinds for future growth.
  • With disinflation expectations influencing market sentiment, attention may increasingly shift towards assessing economic growth prospects.
  • We consider different growth and inflation scenarios to help investors position in this evolving economic landscape.

 

US inflation spells near-term relief for markets

The US April CPI came in-line with consensus, helping to ease concerns after three months of inflation overshoot.

  • Headline CPI: 0.3% MoM (vs. 0.4% prev.) and 3.4% YoY (vs. 3.5% prev.)
  • Core CPI: 0.3% MoM (vs. 0.4% prev.) and 3.6% YoY (vs. 3.8% prev.)

This was a relief for markets and fuelled a dovish reaction across asset classes. Equities surged, UST yields tumbled across the curve, and the USD slumped. Market has now priced in a September rate cut from the Fed, with a second rate cut fully priced in for December.

While there are positive signs, significant challenges remain, and the Federal Reserve's ongoing battle with inflation is not yet over. The FOMC members have been focusing on 3- and 6-month annualised inflation metrics as a more accurate gauge of underlying price pressures, and these did not spell an all-clear message for the Fed.

  • 3-month annualised CPI: 4.6% (vs. 4.6% prev.)
  • 6-month annualised CPI: 3.7% (vs. 3.2% prev.)
  • 3-month annualised core CPI: 4.1% (vs. 4.5% prev.)
  • 6-month annualised core CPI: 4.0% (vs. 3.9% prev.)

Supercore metrics were also not as positive, coming in at 4.9% YoY from 4.8% prior. Disinflation was primarily goods-driven, with core services inflation still high at 5.3% YoY in April. Rental inflation also still remained sticky with shelter prices up 0.4% MoM for a third straight month.

More importantly, one month of softer inflation is not a trend, and the Fed will have to wait for more readings to confirm that the disinflation is intact before cutting rates.

To top it all, commodities are rallying hard. Despite the recent cooling, oil prices are up 10% YTD. Copper is up 27% and even agri commodities are rising now amid weather concerns. This does not appear to be an environment that spells all-clear on inflation and a green signal on Fed cutting rates.

Growth slowdown may be underway

There has been a spate of weaker US data over the last few weeks, none of it still signalling that we may be looking at a recession, but still fading the US exceptionalism story amid super-long positioning as we highlighted in the Q2 FX outlook. Let’s take stock of some of the key data points:

  • Headline Q1 GDP growth slowed to 1.6% QoQ saar from 3.4% in Q4, vs. expectations of 2.5%. Personal spending growth was also slower-than-expected at 2.5% as inflation remained high.
  • ISM PMIs for both manufacturing and services were below the 50-mark in April, signalling contraction in activity levels heading into Q2.
  • S&P Global Flash PMIs for April were also soft, as manufacturing fell into contractionary territory printing 49.9 (exp. 52.0, prev. 51.9). Services fell to 50.9 from 51.7, and shy of the forecasted 52.0, leaving the Composite at 50.9 from 52.1.
  • The Conference Board’s consumer confidence index came in at 97 in April, its lowest since July 2022, signalling risks that consumers may limit discretionary purchases going forward.
  • Retail sales for April came in flat and last month’s was revised lower to +0.6% MoM, signalling that consumers remain pressured by inflation and are finding less support from a cooling labor market (as noted below).
  • Similar sentiment was echoed by several consumer companies on their Q1 earnings calls, including Amazon, Starbucks, and McDonald’s, among others, suggesting that the lower-income consumers have turned more cautious on spending.

More importantly, US labor data has started to signal weakness

  • Nonfarm payrolls (NFP) slowed to 175k in April from 315k in March, printing a sub-200k number for the first time in five months. Unemployment rate rose, and the average hourly earnings growth slowed to 3.9% YoY in April, below 4% for the first time since June 2021.
  • US JOLTS jobs openings in March fell to 8.488mln from the prior, revised lower, 8.813mln and beneath the consensus of 8.686mln which highlighted demand for workers continues to ease, with the headline metric declining to the lowest level in more than three years. Quits rate also fell to 2.1% from 2.2%, its lowest since August 2020, pointing to slower wage growth in the months ahead. There were 1.3 vacancies for every unemployed worker in March, the lowest since August 2021.
  • The employment index of ISM manufacturing for April improved to 48.6, but still remained in contraction. The ISM services employment index fell to 45.9 in April, below 50 for a third month.
  • Flash S&P PMIs for April pointed to an overall decline in employment for the first time since June 2020, with weakness in both the manufacturing and services sectors.
  • Initial jobless claims jumped higher after being steady around 210k since February.

Positioning in this evolving economic environment

For now, Fed rate cuts are getting priced in because of disinflation hopes. But with disinflation baked into market’s expectations, focus could shift more towards the growth side.

Let’s consider four scenarios from here, and the risk-reward is tilted towards a more cautious positioning.

Source: Saxo

-----------------------------------------------------------------------

Recent FX articles and podcasts:

Recent Macro articles and podcasts:

Weekly FX Chartbooks:

FX 101 Series:

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.