Week Ahead: Inflation data to spark markets and rate cut bets

It’s an inflation-heavy week of data releases with the US Core PCE Deflator likely to be the main event. This is commonly quoted as the Fed’s favoured inflation gauge. That is because the data is broader in nature than the more well-known CPI figures, as it covers goods and services prices, plus spending from rural and urban consumers. Secondly, PCE basket weightings are updated more often and so can better account for consumer substitution –think new technology.

There is much hope that the important monthly PCE number will print with a one-handle, similar to the core CPI print last week which came in at 0.163%. It is something when we are watching these figures down to three decimal places, but markets are keen to justify their bets on two Fed rate cuts for this year. It’s worth repeating that this is more than the recent median dot plot of just one reduction seen by FOMC officials. Also worth remembering is that there are only two more Fed meetings before the November US Presidential election. Food for thought, as the greenback advanced north for three straight weeks and near to recent highs, but also strong resistance, above 106 on the Dollar Index.

May Australia CPI will be in the spotlight after the RBA discussed rate hikes at its last meeting. A 0.3% m/m decline mainly driven by seasonal declines in holiday prices could see the annual figure edge higher again from 3.6% y/y. Australian inflation hasn’t fallen on a monthly basis since it troughed in December 2023 at 3.4%. Pressure to respond with higher rates has to be growing, and we note there is still one more (quarterly) inflation reading at the end of July before the early August RBA meeting. AUD/USD remains stuck in a 0.66-0.67 range, waiting for a catalyst.

In Brief: major data releases of the week

Monday, 24 June 2024

– German IFO Business Survey: This gauge of business activity in the eurozone’s biggest economy is forecast to remain steady in June at 89.3. The Institute recently slightly raised its 2024 forecast for growth, citing stronger consumer purchasing power and a recovery in global trade.  EUR threatened a breakdown last week on the back of softer PMIs as it retested key support at 1.0667, a retracement level (76.4%) of the April/June rally.

Tuesday, 25 June 2024

–  Canada CPI: Inflation is expected to come in around 2.5%, which means the disinflation trend is continuing. There is currently around a 68% chance of a second Bank of Canada rate cut in late July. Further moderation in prices and any dovish BoC comments could seal this move and hit CAD, which currently shows record short positioning. The major found support at its 50-day SMA at 1.3695.

Wednesday, 26 June 2024

–  Australia CPI: Consensus sees May inflation printing at 3.8% y/y, an uptick from the prior 3.6%. Economists say that this month will provide some insight into how services inflation is unfolding through the June quarter.

Friday, 28 June 2024

– Tokyo CPI: This data acts as a forerunner of the nationwide trend ahead, which accelerated in May in most gauges. An uptick to 2.5% in June is predicted, due to a pickup in pipeline prices.

– US Core PCE: The key core reading is forecast to come in at 0.1% m/m and 2.6% y/y. That would be the second straight print of 0.2% or lower. The slide in core CPI could pose downside risks. There is at present around a two in three chance of a 25bps September Fed rate cut.