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The end of inflation growth in the US? The data were not surprising

The end of inflation growth in the US? The data were not surprising

created Forex Club16 May 2024

Inflation data in the United States did not surprise for the first time this year. More importantly, they did not surprise with upward readings, which is an important signal for Federal Reserve, although at the same time not changing the rules of the game. Inflation in the US remains high and many signals indicate that it may become more visible this year. So, should the Fed continue to prepare for cuts or, on the contrary, maintain the status quo for a longer time, perhaps until the end of this year.

Readings in line with market expectations

Inflation in the US in April dropped to 3,4% y/y from 3,5% y/y, which was in line with market expectations. Core inflation continued to decline moderately and ultimately stood at 3,6% y/y, in line with expectations, falling from 3,8% y/y in March. The only surprise was the main monthly inflation, which was 0,3% m/m, with expectations of 0,4% m/m. But the key thing is this we have no surprise up, as in every other case this year, which changed the Fed's reasoning. It is worth mentioning that at the beginning of this year 5-6 interest rate cuts were expected, starting the process of normalizing monetary policy already in March. Meanwhile, at the moment two incomplete reductions are expected, although at one point only one was estimated.

After yesterday's inflation reading, expectations for cuts have increased slightly and at this point the single probability of a move in September is estimated at 60%. On the other hand, the combined probability of all meetings until September indicates that one reduction is almost fully priced, although recently there was not even a 50% chance of such a move. Therefore, we are observing a strong weakening of the dollar - in relation to the euro, the dollar is the weakest since March 20. The USD/PLN pair dropped almost to the level of 3,90. More important, however, is the movement on Wall Street, where the Nasdaq and indexes S & P 500 reached historic peaks. However, this is not the end of strong moves. Gold tested around USD 2400 per ounce, being approximately 2% from daily historical highs. Bitcoin is also gaining, testing near monthly highs, exceeding USD 66000 per ounce.

Weak dollar unjustified?

But does the market really have reasons to be satisfied? Oil prices are significantly lower, which gives hope that inflation will remain low. On the other hand, there are signals from the services sector indicating rising prices. Additionally, looking at the dollar, such a strong weakening with the prospect of the Fed maintaining interest rates at least until September seems to be exaggerated. It's worth mentioning that the process of reductions at the ECB, BoE or BoC will most likely start in June and may continue in the following months. With the American economy still strong (although struggling when looking at retail sales and the labor market), such a weak dollar does not seem justified.

In the morning we see the situation calm down. The yen is clearly gaining, although this is the result of falling yields in the US. GDP data from Japan showed a deeper economic contraction in Q1, which may delay further interest rate increases by the BoJ. Just before the opening of the European market, we pay PLN 3,9223 for the dollar, PLN 4,2661 for the euro, PLN 4,9720 for the pound, and PLN 4,3514 for the franc.

Source: Michał Stajniak CFA, XTB

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