Sticky CPI may challenge Fed pause

By Han Tan, Chief Market Analyst at Exinity Group

The incoming US inflation report is set to be a major telltale sign on the Federal Reserve’s next move.

Wednesday’s top tier data release warrants the market’s collective focus, even as US debt limit talks as well as regional banking fears continue to simmer in the background.

Economists predict that April’s headline CPI will rise at a 5% year-on-year clip, matching the prior month’s figure. Core CPI is expected to have eased slightly to 5.5%, relative to March’s 5.6%.

If either headline or core inflation greatly exceed forecasts, that should unnerve expectations that the Fed will soon pause this rate hike cycle.

Knee-jerk boost

The prospects of yet another US rate hike in June should translate into a knee-jerk boost for the US dollar, while likely pulling equities and gold lower.

Should the CPI figures show that inflationary pressures have eased substantially, that should all but confirm that US rates have reached their peak. Such confirmation should prompt the S&P 500 as well as bullion to revisit recent highs, while dragging the Dollar Index back closer to the psychologically-important 100 line.

 

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