This week’s economic data releases have presented a decidedly dovish picture for the Federal Reserve. Following the weaker-than-anticipated April Consumer Price Index (CPI), the Producer Price Index (PPI) experienced a significant drop of 0.5% month-on-month, contrasting sharply with expectations of a 0.2% increase. Furthermore, there were substantial upward revisions to the March PPI data. On a year-on-year basis, the headline PPI decreased from 3.4% to 2.4%, while the core PPI, which excludes volatile food and energy prices, fell from 4% to 3.1%, indicating a potential easing of inflationary pressures at the producer level. Retail sales showed a modest increase of 0.1% month-on-month, slightly exceeding the consensus forecast of 0.0%. However, the control group, a more reliable indicator of underlying consumer demand that excludes volatile components such as gasoline, automobiles, and building materials, revealed a decline of 0.2% month-on-month, falling short of the expected 0.3% increase, according to ING’s FX analyst Francesco Pesole. These figures suggest a potential softening in consumer spending, which could further influence the Federal Reserve’s monetary policy decisions. The mixed signals from inflation and retail sales data are creating uncertainty in the market regarding the Fed’s next move.
Risks remain skewed to the downside for DXY
“The USD OIS 2Y swap rate has adjusted 10bp lower from the 3.8% peak, but does not seem to be taking the dovish signals from data at face value given the tariff distortion, and pricing for a Fed cut before September remains below 50%. The dollar short-term rates relationship has loosened in the past two months, but the market’s bearish USD tendency means further dovish repricing could prove to be the catalyst for fresh dollar short building.” This suggests that despite the recent dovish data, the market is not fully convinced that the Federal Reserve will cut interest rates in the near term, potentially due to concerns about the impact of tariffs on inflation and economic growth. The possibility of further dovish repricing, driven by the market’s existing bearish sentiment towards the US dollar, could lead to increased short positions on the currency.
“There aren’t any tier-one data releases in the US today. Housing starts are expected to have increased in April, potentially indicating a rebound in the housing market after a period of slowdown. Import prices are projected to have dropped, primarily driven by lower oil prices, which could contribute to further disinflationary pressures. The University of Michigan surveys have the potential to influence foreign exchange (FX) markets, particularly the data related to inflation expectations. The median expectation for price changes over the next year surged from 2.8% in December to a notable 6.5% in April. However, markets are approaching these figures with caution, recognizing the relatively small sample size of only 500 households and the potential for political bias to skew the results. This caution reflects the understanding that survey-based inflation expectations can be volatile and may not always accurately reflect actual inflation trends. The market will be closely watching these indicators for further clues about the direction of inflation and the Federal Reserve’s likely response.”
