US Inflation: A Make-or-Break Print

#OPINIONLEADER#

It’s D-day of the week: we will see whether inflation in the US started easing in April after hitting a four-decade high in March, and if yes, by how much.

The consensus of analyst estimates on Bloomberg hints that consumer price index may have eased to 8.1% in April, from 8.5% printed a month earlier.

A soft inflation read will come as a relief that the Federal Reserve’s (Fed) efforts to tame inflation start paying off, and that the Fed doesn’t need to get much more aggressive to bring inflation back towards its 2% policy target. In which case, a couple of 50-bp hikes and the announced balance sheet reduction should suffice to deal with inflation and cool the hawkish Fed expectations.

If however, inflation hasn’t pulled lower as expected – and worse, if we see a higher figure than last month print, we would see another big wave of selloff across all assets, as a persistent rise in inflation from the actual levels would get investors to bet for a 75-bp hike from the Fed in a next meeting.

Cleveland Fed President Loretta Mester said yesterday on Bloomberg TV that ‘they don’t rule out 75bp hike forever’.

For now, activity on Fed funds futures give almost 90% chance for a 50-bp hike in FOMC’s June meeting; there is a lot left to be priced for a 75bp hike, if the data doesn’t please. To avoid pricing in a 75bp hike at next FOMC meeting, we must see an encouraging cooldown in inflation.

Pre-CPI recovery

The pressure on the US 10-year yield eased yesterday, along with a rebound across the equity space, which helped the S&P500 eke out a slim 0.25% gain to close the session just a point above the 4000 mark. Nasdaq gained the most with a one percent jump. We should see further gains in case of a satisfactory inflation report.

The US dollar extended gains, despite the easing yields yesterday, as the risk-off flows continued supporting the greenback. The levels against the majors like euro, yen and sterling remained flat, but the positive pressure in the dollar, combined with Turkey’s unconventional monetary policy start giving signs of exhaustion. The dollar-try advanced past the 15 mark, and the government asked institutions to make their FX operations within the most liquid trading hours. Two weeks ago, the bank had revised its regulations on banks’ reserve requirements, applying them to the asset side of balance sheets in order to strengthen its macroprudential policy toolkit. The latter required reserves now pressure the overnight rates to the upside – suggesting that the unconventional policy is near limits.

Energy up and down but mostly up

US gas prices hit a record again this week, while the barrel of US crude tipped a toe below the $100 level on news that the Europeans softened their sanctions proposal against the Russian oil, now suggesting banning the European vessels to carry Russian oil.

But oil is already above the $100 this morning and news that Russian gas flows via one of the key entry points in Ukraine will stop from today – as troops disrupt operations, sent the European gas prices 5% higher on Tuesday. Therefore, the pressure remains positive on energy prices, but the upside potential is fading due to slower global growth prospects, and the Chinese lockdown.