What are the primary occasions to look out for right now?

It’s finally the US
CPI Day. Markets have been waiting eagerly for this moment and it will likely
lead to a more sustained trend. We will also get the US Retail Sales figures
released at the same time but it’s fair to say that barring huge surprises,
they won’t matter that much.

US CPI 12:30 GMT
(08:30 ET)

The US CPI Y/Y is expected
at 3.4% vs. 3.5% prior, while the M/M measure is seen at 0.4% vs. 0.4% prior.
The Core CPI Y/Y is expected at 3.6% vs. 3.8% prior, while the M/M reading is
seen at 0.3% vs. 0.4% prior.

Given the market’s pricing
and general fear of persistently high inflation, a downside surprise will
likely trigger a much bigger reaction than an upside surprise. Fed Chair Powell pushed back against rate hikes expectations at the last FOMC Press
Conference as he stated that they would need
“persuasive” evidence that their policy isn’t restrictive enough. He repeated
basically the same message yesterday at an event at the foreign bankers association.

So, if
inflation remains high but doesn’t re-accelerate notably, they will just keep
rates higher for longer. The market expects almost two rate cuts (45 bps) by
the end of the year which can easily go back to one or even zero in case we get
another hot inflation report. A soft report might add one extra cut to the
pricing but not much more as the Fed will want to cut rates at a meeting
containing the SEP (barring a quick deterioration in the labour market), which
falls in September at the earliest.

Looking at the big picture,
I’d say the bigger risk is inflation getting stuck above the Fed’s target
rather than a second wave. Such a scenario though could change long term expectations
if inflation remains high for too long. At that point, a second wave would be

Right now though, we are
not seeing that. Yes, some measures of inflation expectations ticked higher recently,
but they are mostly rangebound. Leading indicators show that the labour market
is easing, and wage growth is slowly returning to pre-pandemic levels.

The Fed is looking at the yield
curve and real rates and sees the policy setting restrictive, which is
technically correct. Some say that it looks like the 70s but back then real
rates were negative, and we hadn’t the 2% target that anchored expectations.

In the chart above, we can
see a simple example with US vs. German real rates in the 70s. US had negative
real rates for most part of the 70s while the Germans had positive real rates. The
inflation rate in Germany averaged around 4.8% with lower volatility while in
the US it was almost double with higher volatility.

Everyone knows that the Fed
made a mistake with the December 2023 pivot as that unleashed the “animal
spirits” in the markets, but the Fed re-pivoted in March 2024 favouring a
higher for longer stance until they gain enough confidence that inflation is returning
to target.

I’d say the trade was in Q1
2024 when we repriced the seven rate cuts. Now, we are in kind of a limbo where
we are seeing growth with disinflation decelerating or even stopping. This kind
of environment should favour stocks over bonds and generally be positive for
risk sentiment until something breaks.

SALES 12:30 GMT (08:30 ET)

The US Retail
Sales M/M is expected at 0.4% vs. 0.7% prior, while the ex-Autos M/M figure is
seen at 0.2% vs. 1.1% prior. We got some soft consumer sentiment reports
recently which might filter through lower consumer spending. The retail sales
data is notoriously volatile and given that it will be released at the same
time of the CPI report, the market will likely ignore the release barring huge

This article was written by Giuseppe Dellamotta at