US Inflation: Fire or Ice?

May 15, 2024

Elias Haddad

US Inflation: Fire or Ice?

USD is trading on the defensive ahead of today’s US April CPI and retail sales reports.

Sweden’s April inflation data supports the Riksbank’s guidance to cut the policy rate two more times during the second half of the year.

Australia wages growth appears to have peaked.

USD is building on yesterday’s losses triggered by the mixed US April PPI report. Hotter than expected PPI inflation in April (actual: 0.5% m/m vs. consensus: 0.3% m/m) was offset by a cooler PPI print for March PPI (-0.1% m/m vs. initial estimate of +0.2% m/m).

In our view, the US April PPI report does not justify sustained USD weakness. The category of PPI (ex-trade, transportation, and warehousing) that feeds into the policy-relevant PCE calculation rose 0.6% m/m in April vs. 0.3% in March to be up 4.4% y/y, matching the August 2023 high. This suggests inflationary pressures remain high and will keep the Fed cautious from easing too early.

Indeed, Fed Chair Jay Powell reiterated yesterday the Fed’s mantra to keep rates higher for longer because of the lack of inflation progress. Powell also emphasised again that it’s unlikely that the next policy rate move will be a hike.

The big issue for the US inflation outlook is whether producers manage to pass rising costs on to consumers. Interestingly, anecdotal evidence from the April Fed Beige book showed that firms’ ability to pass cost increases on to consumers had weakened considerably in recent months. Let’s see if the hard data confirms that when the US April CPI print is released today (1:30pm London).

In April, US headline CPI is expected to rise for a second consecutive month by 0.4% m/m to be up 3.4% y/y vs. 3.5% in March. Core CPI is projected to rise 0.3% m/m vs. 0.4% in March and be up 3.6% y/y vs. 3.8% in March. Pay particular attention to the super core CPI (core services less housing), a key factor behind the lack of progress on disinflation. In March, super core CPI increased 0.7% m/m after rising 0.5% in February to be up 4.8% y/y, the highest since April 2023.

The US April retail sales report is the other major data release today (1:30pm London). Retail sales is forecast to rise 0.4% m/m vs. 0.7% in March while the control group used for GDP calculations is expected at 0.1% m/m vs. 1.1% in March. Overall, consumer spending will likely remain resilient, supported by robust demand for labor and positive real wage growth.

Speculators have accumulated historically large net long USD positions. As such, anything short of a stronger than expected US CPI and/or retail sales report can further weigh on USD in the short-term.

SEK upside is limited. Sweden’s April CPI report supports the Riksbank’s guidance to cut the policy rate two more times during the second half of the year as inflation is approaching the target. Annual headline CPI inflation slowed a tick more than expected to 3.9% vs. 4.1% in March. The policy-relevant CPIF was also a tick lower than expected at 0.3% m/m and 2.3% y/y (vs. 2.2% in March). CPIF ex-energy remained at 2.9% y/y for a second consecutive month. The Riksbank Minutes of the May 7 policy decision is up next (8:30am London).

AUD/USD will struggle to break higher. Australia wage growth appears to have peaked suggesting interest rate futures are under-pricing the risk of an RBA cut later this year (30% odds of a 25bps cut by December). Annual nominal wages growth slowed a tick more than expected to 4.1% in Q1 from 4.2% the previous quarter.

Nevertheless, looser fiscal policy in Australia complicates the RBA’s job of getting inflation down to target. The government projects the budget to swing from a surplus of 0.3% of GDP for the current fiscal year ending June 2024 to a deficit of -1% of GDP for fiscal year 2024/25. The budget deficits for the next three years are also higher compared to the December 2023 Mid-Year Economic & Fiscal Outlook (MYEFO). 2024/2025: -1% of GDP vs. -0.7% in the MYEFO. 2025/2026: -1.5% of GDP vs. -1.2% in the MYEFO. 2026/2027: -0.9% of GDP vs. -0.6% in the MYEFO.

CNH rallied on reports that China is considering a proposal to have local governments across the country buy millions of unsold homes. This is encouraging news and could help ease China’s property slump. However, it does not deal with the root cause of China’s structural economic headwind: the country’s inability to rebalance the economy away from unproductive debt-fueled, investment-led growth towards consumption.

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