What to expect going into the US CPI data
The market is drifting sideways ahead of key risk events today, with the ECB policy meeting decision to come first before the US CPI data release.
The former may be a bit of a non-event, though it does have the propensity to surprise. However, the latter is what broader markets are more focused on today.
The estimate for US CPI in May is for the annual reading to tick higher from +4.2% y/y in April to +4.7% y/y. Meanwhile, the core reading is estimated to climb from +3.0% y/y in April to +3.5% in May.
Base effect adjustments alongside supply chain issues are both part of the story here so that makes the report rather distorted when trying to decipher as a whole.
There is a growing consensus that we will see a beat (maybe even a really strong one) on the readings and that might produce a kneejerk reaction higher in the dollar and yields.
However, the thing to note is that such a release will still be brushed aside by the Fed surely as part of transitory factors. Pictet points out that we might see a peak in US CPI over the next 2-3 months before it tails off and slides towards next year:
That is arguably what the Fed is viewing as well for the time being.
As such, we could see the market fade a stronger release later in the day after the initial reaction. On the other hand, a disappointing release may see a more straightforward reaction which sends yields and the dollar both lower.