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• US CPI inflation forecast to have eased a bit in April
• Retail sales to reveal the domestic demand’s strength
• Dollar might benefit from a strong inflation print but stocks could suffer
• The April CPI report will be released on Wednesday 12:30 GMT

The aggressive deceleration in US inflation seen during 2022 has paused over the past few months with CPI proving stickier than widely expected. As a result, the market is now expecting just 42bps of monetary policy easing by the Fed during 2024 with the CPI dataset continuing to have a significant market impact.

What has happened since the last CPI report?

Last month, both the headline and core CPI components for March managed to surprise the market by printing above expectations. The US dollar enjoyed a boost across the board, but US stocks suffered as the probability of a June rate cut by the Fed dropped aggressively.

Since then, the data flow has been mostly on the weak side. Except for retail sales, the economy appears to be slowing down as made evident by the various business surveys, the preliminary GDP print of the first quarter of 2024 and the recent labour market report. However, various inflation indicators point to continued price pressures.

This is the main reason why the May 1 Fed meeting was relatively balanced. Fed members understand the need for patience as the economy progresses. Cutting rates at this juncture might further fuel the strong domestic demand, partly responsible for the current inflation stickiness, and potentially cause a heated reaction from the Republican Presidential candidate, Donald Trump.

The April CPI report will be released on Wednesday

The market is expecting a small deceleration across the board as the headline figure is seen rising by 3.4% year-on-year with the core indicator, which excludes food and energy prices, edging lower to 3.6% yoy. With both the food and energy price pressures remaining weak, the focus will be on shelter.

Considering this sector’s weight to the overall CPI figure, a further deceleration in shelter costs appears vital to opening the door to Fed rate cuts. House prices turned the corner about a year ago and are currently recording steady yearly growth. Assuming that there is a 12-18 months lag between house prices and shelter costs, there is an increasing possibility of the latter continuing its recent slowdown.

Will the Fed react to the CPI report?

There are two inflation reports until the June 12 Fed meeting. The market is currently assigning only a 5% probability for a June rate cut, with this percentage rising considerably for the September meeting. This market pricing matches the updated Fed expectations by certain key investment houses looking for just two rate cuts in 2024.

Considering the multiple Fed members’ appearances arranged for this week, one should expect a plethora of commentary on the inflation report. Rather conveniently, one of the arch hawks of the FOMC, Minneapolis President Kashkari, will be on the wires on Wednesday. He will most likely remain hawkish if CPI does not significantly surprise on the downside.

Strong market reaction upon another CPI shock

Should both the headline and core subcomponent surprise again to the upside, US equities stand to suffer, especially if retail sales released also on Wednesday point to an undying spending thirst from US consumers. The dollar could cancel out part of last week’s underperformance against the euro and fuel another rally in dollar/yen. More specifically, a move towards the recent 160.40 high could be on the cards, possibly forcing the BoJ to intervene again in the market.

On the flip side, a weaker inflation report could result in a significant upleg in US equities, especially if the headline CPI figure falls below the 3% threshold. The dollar might be under pressure with the euro/dollar pair finally managing to rally above the converging simple moving averages at the 1.0784-1.0821 range. Similarly, dollar/yen could reverse last week’s bullish move with the October 21, 2022 high of 151.94 looking like a plausible target.

• Gold loses momentum after reaching a two-week high
• Short-term risk remains skewed to the upside above 2,325

The week began with gold losing ground and giving up the gains it made on Friday when it reached a two-week high of 2,378.

Technically, the bounce back above the resistance line from March and the 20-day simple moving average (EMA) feeds optimism that the latest upturn could resume as the RSI keeps fluctuating clearly above its 50 neutral mark and the price has yet to reach the upper Bollinger band.

Still, if the current bearish pressures strengthen below the 2,325-2,337 area, reducing the odds for a bullish continuation, the focus might shift to the 2,283-2,300 trendline territory where the 50-day SMA is converging. Should the bears breach the 38.2% Fibonacci retracement of the February-April uptrend at 2,260 too, the decline could then stretch towards the support trendline from February seen at 2,237.

Should the opposite scenario occur, the bulls might aim to breach the range of 2,378 to 2,400, with the possibility of retesting the all-time high of 2,431 or creating a new higher high between the ascending line from the 2022 low at 2,475 and the psychological level of 2,500.

All in all, the latest rebound in the market might remain attractive in the short term if the price manages to hold above 2,337-2,325. Otherwise, the yellow metal might revisit May’s lows.

On April 16, we wrote why the $2,380 zone is an important resistance area.

The XAU/USD chart shows that:

1) After fading fluctuations (they formed a narrowing consolidation triangle - shown in green), the price of gold dropped sharply (shown by a black arrow) on April 22-23.

2) Then, the price found support in the form of the lower border of the ascending channel (shown in blue), which has been in effect since the beginning of March. This led to the formation of another consolidation pattern between the blue lines.

3) An upward breakdown of the red lines on May 9 could be interpreted as an attempt by the bulls to resume the upward trend within the blue channel, but we could expect that the green triangle with its axis around 2380 would provide resistance.

However, it is important to pay attention to the nature of buyers’ behaviour when the price approaches an important resistance - the XAU/USD chart shows that the bulls’ persistence has quickly depleted. From the point of view of technical analysis of the gold price, a bearish engulfing has formed on the chart (shown by a blue arrow) in the area of 2380. In other words, the price of gold tested the resistance level, revealing the activity of bears defending their territory.

From the point of view of fundamental analysis, market participants can position themselves ahead of the key news for the beginning of the week: the CPI index will be published on Wednesday at 15:30 GMT+3.

But if economic or geopolitical news does not change the balance, in which, as we observe, the initiative is on the side of the bears, then this may create a threat of a breakdown of the blue channel’s lower border.

Markets

Fed speak cemented the higher-for-longer case last week. On Friday, governor Bowman said she doesn’t expect any policy rate cuts this year. Following three or four months on inflation disappointments, she wants to see a number of months of progress (and a number of probably meetings as well) to be confident that inflation is returning to the 2% target. Earlier in the week, Boston Fed Collins, SF Fed Daly and Atlanta Fed Bostic all said that reaching that confidence will “take more time” than previously thought with Minneapolis Fed Kashkari also hinting that policy rates will remain at the peak levels for an extended period of time. Chicago Fed Goolsbee, dove by nature, was the odd one out last week. He said that he doesn’t see much evidence of inflation stalling out at 3%, but doesn’t want to tie his hands when it comes to the timing of making monetary policy less restrictive. Recent eco data confirmed the inflation threat/risks. Accelerating prices paid components for example clashed with weakening growth momentum in ISM surveys. Friday’s University of Michigan consumer survey showed a similar split. Economic sentiment hit a YtD low while inflation expectations rose to a YtD high for the short-term (1-yr; 3.5%) and the long-term (5-10-yr; 3.1%). US Treasuries underperformed German Bunds with US yields closing 5 bps (2-yr) to 3.1 bps (10-yr) higher. Changes on the German curve ranged between +3.1 bps (2-yr) and +2.1 bps (30-yr). Correcting oil prices ($84.5/b to $82.5/b) partially help explain the curve move. The dollar kept a narrow trading range with EUR/USD closing at 1.0771. The eco calendar is thin today with NY Fed inflation expectations and more Fed speak. US PPI data are a step-up tomorrow to Wednesday’s April CPI print. Retails sales are due the same day.

EUR/GBP closed the week below 0.86 (0.8595) even as the Bank of England May policy meeting suggested that the BoE could cut its policy rate when it meet next in June. BoE Ramsden joined Dhingra in already voting for a rate cut (7-2) with the forward guidance in the policy statement now extended with the sentence “The Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding”. New inflation forecasts (based on the current market rate path) suggest inflation to drop to 1.9% by Q2 2026 (from 2.2%) and to 1.6% by Q2 2027. It prompted comments by BoE governor Bailey that the central bank could end up easing somewhat more. This week’s labour market report and Q1 wage data (PAYE) will immediately give an indication if current market pricing (50% probability for June) is too conservative or not. We err on the side of a June rate cut, sticking with our negative GBP-bias.

News & Views

Chinese inflation rose by 0.1% M/M and 0.3% Y/Y in April, up from 0.1% Y/Y in March. Core inflation, excluding food and energy, rose 0.7% Y/Y (0.6% in March). Services price rose 0.8% Y/Y. Food prices continue to decline (-2.7% Y/Y). While slightly higher than expected, the data still indicate mediocre demand in the Chinese economy as authorities are putting in place a policy of balanced economic stimulus. Chinese producer price growth in April remained deep in deflationary territory at -2.5% Y/Y. Even as it improved from -2.8% in March, it remained lower than expected and negative since October 2022. Other data this weekend also showed that aggregate financing in the country unexpectedly declined in April, the first decline since 2005. Lower than expected government bond issuance and weak overall demand for borrowing contributed. In this respect, the government announced to start selling a total of CNY 1 tn government bonds with ultra-long maturities with a first sale of 30-y bonds expected as soon as next Friday.

US president Biden is rumoured to announce a sharp rise of tariffs of several (strategic) goods the country is importing from China. The US is said to maintain existing tariffs on many goods that were decided by the previous government. At the same time, tariffs would be raised in sectors like semi-conductors and solar equipment, batteries, but also steel and aluminum. The Tariff on Electrical Vehicles for China even is said to be raised from 27.5% to 102.5%.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed’s higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed’s Powell left the door open for rate cuts later this year. Soft US ISM’s and weaker than expected payrolls supported markets’ hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling’s downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 - 0.8768 trading range serving as the first real technical reference.

The FTSE 100 and the Stoxx 600 index closed at a fresh ATH on the back of rising dovish central bank expectations. The EURUSD bounced lower from the 50 and 200-DMA, while Cable tested its own 200-DMA to the upside on the back of strong GDP read last Friday, but the currency pairs need good news from the US inflation front to clear key resistances this week.

Released on Friday, the US Michigan sentiment and expectations numbers were a disaster. Not only the data showed that sentiment tanked in May, but the series of data also pointed at rising inflation expectations for the next year to 3.5%. That’s pretty much in line with where the US CPI has been stagnating since the end of last summer. Worse, the core CPI – which excludes useless stuff like food and energy that no one needs, is coming down slowly, but the index is sitting just a touch below the 4% level – that’s almost twice the Fed’s 2% inflation target. And the unideal inflation dynamics explain why the Federal Reserve (Fed) won’t be in a position to cut the rates soon.

So it’s in this tense and uncertain conditions that the US inflation data will land this week. A consensus of analyst estimates on Bloomberg survey points at a small improvement in both headline and core measures. If that’s the case, investors could breathe a sigh of relief and enjoy the dovish news from other central banks. We would then see the euro and sterling extend gains against the dollar, the yields ease and stock markets surf on a fresh wave of optimism. But if the numbers surprise to the upside for the 4th straight month, it will be hard to keep the Fed hawks contained. The dollar index kicks off the week a touch above the 105 level, the S&P500 is at a spitting distance from an ATH level, the US 2-year yield spiked to 4.87% on Friday, and activity on Fed funds futures gives around 60% chance for a September rate hike from the Fed. It will be interesting to see how the things will evolve from now to the end of the week. I am afraid there is a chance that we see another bad surprise given the surge in many regional Fed surveys.

Happily, the crude oil chart gives some hope regarding the energy inflation. The barrel of US crude fell 1.75% on Friday and slipped below the 100-DMA. The price of a barrel has been unable to make a move above the all-important $80pb level since it fell below this level at the start of May. Yet the geopolitical tensions remain high as Israel doesn’t listen to ceasefire calls from the US and the rest of the world. The US is in a tough position; it can’t really turn its back to its strongest ally, but the situation in Gaza and the rising protests against Biden’s ties with Israel give a very sour taste to Biden’s election campaign. So Biden – who is stuck between a rock and a hard place – vents his frustration on China; he is planning to double, triple or even quadruple levies on some Chinese goods.

China, on the other hand, continues to struggle with its own demons. Released during the weekend, the data showed that consumer inflation rose more than expected in April to 0.3% on a yearly basis, but producer price deflation continues with a 2.5% retreat in April. More disquietingly, the aggregate financing in China fell for the first time in history on the back of slower government bond issuance and a decline in shadow banking. The Chinese CSI 300 index is up by nearly 18% since the February dip. UBS and BNP upgraded their view on MSCI China recently, but the rally remains on a slippery path provided that the geopolitical challenges result in a deepening trade and technology war.

Elsewhere, the earnings calendar is busy with US big retailer earnings this week. The Chinese Alibaba will also report earnings, OpenAI is expected to announce some updates this Monday and Alphabet’s Google hosts its annual developer conference this week, which could bring plenty of AI news on the headlines.

In focus today

Today will be quiet on the data front, with no major releases scheduled.

The focus for remainder of the week will primarily be on US inflation for April, due Wednesday. Tuesday sees the release of US April PPI, which could give hints on the forthcoming CPI report. In Europe, the German ZEW survey for May is published on Tuesday, followed by euro area industrial production on Wednesday. Friday brings final April inflation data for the euro area, where we especially look out for what drove the still strong service inflation. In Scandinavia, Swedish inflation for April will be the one to watch. Turning to Asia, we get the first estimate of Japanese Q1 national accounts, and Chinese policy rate announcements on Wednesday and the fresh batch of monthly economic data on Friday.

Economic and market news

What happened overnight

The Bank of Japan sent a hawkish signal to markets by cutting the amount of Japanese government bonds it offered to buy in a routine operation. This marks the first cut since December. Specifically, the offer amounts for bonds maturing in 5-10 years was cut to 425 billion yen (USD 2.73 billion) from 475 billion yen at the previous operation on 24 April. The yen initially strengthened, but USD/JPY is currently trading around 155.78, while the 10-year JGB yield is up, hovering around 0.943%.

China's finance ministry reported this morning that it begins selling long-term treasury bonds worth 1 trillion yuan (USD 138.23 billion) this week, with tenors ranging from 20 to 50 years). The initiative was first introduced some weeks ago during China's parliamentary conference in March, and thus not surprising for markets. The funds raised through the issuance will support the rebuilding of disaster-hit areas and infrastructure improvement.

What happened over the weekend and Ascension Day

In the US on Friday, the Flash Michigan survey for May showed a weakening in consumer sentiment and higher inflation expectations. 1y inflation expectations climbed to 3.5%, the highest release since last November, and worryingly, it comes despite the recent downtick in oil prices. Additionally, on Thursday Atlanta Fed President Raphael Bostic (hawk and a voting member) stated that inflation would likely ease under the current monetary settings and allow the Fed to initiate its cutting cycle in 2024. On Friday, Fed official Lorie Logan (hawk and not a voting member) cautioned it is too early to think about rate cuts.

On the political front, the Biden administration intends to increase tariffs on Chinese vehicle imports from 25% to 100%. The initiative is part of an effort to safeguard American industry ahead of the US election and is expected to be announced tomorrow.

In Europe, the ECB minutes from last month's meeting showed increased confidence in reaching 2% inflation and hinted at a potential rate cut in June. For instance, some ECB members already felt confident in a reduction of the policy rates at the April meeting, while the following was phrased in the minutes from Friday: "It was seen as plausible that the Governing Council would be in a position to start easing monetary policy restriction at the June meeting if additional evidence received by then confirmed the medium-term inflation outlook embedded in the March projections".

In the UK, on Thursday, Bank of England (BoE) kept the Bank Rate at 5.25% as widely expected. Additionally, BoE delivered a dovish tweak to its communication, priming markets for an imminent start to a cutting cycle. We continue to pencil in the first 25bp cut in June.

In Sweden, on Wednesday the Riksbank delivered a 25bp cut in accordance with market expectations. Accordingly, the market reaction was muted. We had expected the Riksbank to wait until the June meeting before embarking on its cutting cycle. Thus, we remove our baseline forecast for 25bp in June, but maintain our profile for two 25bp cuts in September and December. For more information, please see Riksbank review - Start of a gradual cutting cycle, 8 May.

In Norway, inflation in April surprised somewhat to the upside, with headline inflation printing 3.5% y/y (0.9% m/m) and core inflation coming in at 4.4% y/y (0.9% m/m). That said, the underlying inflation, measured as a seasonally adjusted 3m moving average of the annualised m/m changes, stood unchanged at 2.8%, signalling that the disinflationary process clearly continues. Services prices excluding rent came in lower than expected, edging down to 4.5% y/y from 5.0% y/y, which should be positive news for Norges Bank, as the main risk currently is that higher wage growth will channel into higher service inflation.

In China, consumer inflation for April came in higher than expected at 0.3% y/y (cons: 0.2%) and 0.1% m/m (cons: -0.1%). The uptick was primarily attributed to price increases within energy, education, and tourism, neglecting the declining food prices. This marks the third consecutive month with prices increasing, indicating a slight recovery in domestic demand.

Market movements

Equities: Global equities ended higher on Friday, marking gains on four out of five days last week. After a nearly 2% gain last week, many of the major indices are now within a hair's breadth of all-time highs. This includes the MSCI World, which is now less than 1% away from its peak in late March. Last week's equities surge was based on a more benign yield environment. Although yields did not decrease, they stayed off their April highs, halting their one-way upward trajectory. Volatility and implied volatility steadily decreased last week, with VIX ending the week at 12.5. Hence, we now argue that the risk on volatility has now shifted to the upside. US markets on Friday were mixed: Dow +0.4%, S&P 500 +0.2%, Nasdaq -0.02%, and Russell 2000 -0.7%. Markets are mixed in Asia this morning, and European and US futures are similarly mixed.

FI: Global rates range-traded in the second half of last week with long-end UST/Bund rates ending the week close to unchanged from their respective starting points last Monday. The US quarterly refunding auctions were well-bid in the 10Y and 30Y segments with bid-to-cover ratios slightly higher compared to the most recent auctions. Additionally, sentiment gained support from the dovish signals coming out from the BoE meeting. As a counterweight to these tailwinds, the Michigan survey released on Friday showed higher inflation expectations among US households in May, which comes despite the downtick in oil prices seen lately. The pricing of ECB rate cuts in 2024 is down to 67bp from 74bp last Monday. The Bund ASW spread is trading at 31.5bp, the lowest level since early April. We keep the view that the Bund ASW-spread should be trading around the 30bp level.

FX: EUR/USD still trades between the 1.07-1.08 mark. EUR/GBP remained close to the 0.86 mark despite stronger than expected GDP numbers and a push-back on imminent rate cuts from the Bo'’s Pill. The kneejerk sell-off in the SEK after the Riksbank cut the policy rate on Wednesday last week has fully reversed with EUR/SEK spot back below 11.70, while EUR/NOK hovers around 11.70.

Daily Pivots: (S1) 194.62; (P) 194.98; (R1) 195.48; More..

Further rise is mildly in favor in GBP/JPY. Rebound from 191.34 is seen as the second leg of the corrective pattern from 200.53, and could target 197.40 resistance. On the downside, break of 193.82 minor support will argue that the third leg as started, and turn bias back to the downside for 191.34 support.

In the bigger picture, a medium term top could be in place at 200.53 after breaching 199.80 long term fibonacci level. As long as 55 W EMA (now at 183.41) holds, fall from there is seen as correcting the rise from 178.32 only. However, sustained break of 55 W EMA will argue that larger scale correction is underway and target 178.32 support.

Daily Pivots: (S1) 167.48; (P) 167.72; (R1) 168.03; More...

Further rise is mildly in favor in EUR/JPY despite loss of momentum as seen in 4H MACD. Rebound from 164.01 is seen as the second leg of the corrective pattern from 171.58, and would target 168.64 resistance. On the downside, break of 166.73 minor support will argue that the third leg has started, and turn bias back to the downside for 164.01.

In the bigger picture, a medium top could be formed at 171.58 after brief breach of 169.96 (2008 high). As long as 55 W EMA (now at 157.89) holds, fall from there is seen as correcting the rise from 153.15 only. However, sustained break of 55 W EMA will argue that larger scale correction is underway and target 153.15 support.

Daily Pivots: (S1) 0.8592; (P) 0.8602; (R1) 0.8609; More...

Intraday bias in EUR/GBP remains neutral for the moment. On the downside, below 0.8585 minor support will argue that rebound from 0.8529 has completed, and larger fall might be ready to resume. Intraday bias will be back on the downside for 0.8529 support first.

In the bigger picture, outlook remains bearish as EUR/GBP is capped below medium term falling trendline. That is, down trend from 0.9267 (2022 high) is still in progress. Firm break of 0.8491/7 will target 100% projection of 0.8764 to 0.8497 from 0.8643 at 0.8376.

Daily Pivots: (S1) 1.6287; (P) 1.6307; (R1) 1.6330; More...

Intraday bias in EUR/AUD remains neutral for the moment. While stronger recovery might be seen, further decline is expected as long as 1.6494 resistance holds. Fall from 1.6742 is seen as the third leg of the corrective pattern from 1.7062. Break of 1.6216 will turn bias back to the downside to 1.6127 support, or further to 100% projection of 1.7062 to 1.6127 from 1.6742 at 1.5807.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). In case of deeper fall, strong support is expected around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.7062 is in favor as a later stage.