The risk mood in the session has been leaning on the defensive ahead of the US CPI report in roughly an hour. The culprit though is the lack of any breakthrough in the US-Iran stalemate.
We’ve been getting reports since yesterday that Trump is now considering a resumption of the war more seriously as the ceasefire holds on “life support” after a “garbage” Iran’s peace proposal. The reports added that no major decision is expected before Trump-Xi summit.
The most notable mover was the Japanese yen as the currency whipsawed early in the session after another suspected intervention. US Treasury Secretary Bessent reaffirmed in a post on X “the strong economic partnership between the United States and Japan”. He also added that the level of communication and coordination between their teams in addressing undesirable, excess volatility in currency markets continues to be constant and robust.
This wasn’t the culprit for the spike in the yen though and in any case, the move was quickly erased and the USD/JPY pair rallied back into the key resistance zone around the 158.00 handle. The macro backdrop remains negative for the yen and this is likely to keep weighing on the currency.
In terms of economic data, we got the German ZEW index showing business conditions worsening further, with it being the worst since December last year. The US NFIB Small Business Optimism Index was basically unchanged from the prior month, with inflationary pressures continuing to be the major challenge. Lastly, India’s inflation climbed to 3.48% in April, primarily driven by firming food prices.
In the American session, the main highlight will be the US CPI report. Headline CPI Y/Y is expected at 3.7% vs 3.3% prior, while Core CPI Y/Y is seen at 2.7% vs 2.6% prior. Elevated energy prices have pushed headline inflation back above the 3.0% mark. Inflation was elevated before the war started though and this latest shock just added more upside risk. I don’t think today’s data is going to change much for the market unless we get significant deviations from the expected numbers.
For context, the annual Core PCE rate (which is what the Fed targets) has been sticky near the 3.0% level since 2024 and recently rose to the highest level since December 2023. Also, let’s not forget that the Fed has been missing its 2% target since 2021. Fed’s Hammack recently said that there are concerns among businesses that an inflationary mindset is starting to become entrenched in people’s minds.
In the markets, it’s been kind of consensus that the Fed has abandoned the 2% target and now focuses more on keeping it in a 2-3% range like the RBA. With such expectations it could be very hard to get inflation sustainably back to the 2% target without a more significant slowdown in the economy. The problem is that the Fed has been focusing more on the labour market and the soft landing, which had the side-effect of indirect financial easing through stock markets.
