- Tech trade remains strong, sending the S&P 500 to a 13-month high
- Ahead of the May inflation report, Fed swaps are pricing a 23.8% chance the Fed will raise rates on Wednesday
- Dollar and Treasury yields edge higher
US stocks are rallying ahead of a massive macro week that contains a key inflation reading, some major central bank rate decisions, and many important economic readings. The S&P 500 bull market rally looks like it doesn’t want to stop, which means Wall Street appears confident that the Fed will not be delivering its 11th straight rate hike this week. The Fed will try to keep optionality for further tightening available later this year, and that should support their ‘higher for longer' stance.
A hot May inflation report could disrupt the Fed’s plan to deliver a ‘hawkish skip.’ Inflation should be coming down, given the trend with gasoline prices, a more seasonable rise in food prices, and the negative base effects. If the US economy is dealt a hot report, the Fed may have to debate delivering one more rate hike and possibly signal they might need to stand ready to do more.
The headline inflation is expected to slow from 0.4% to 0.1% on a monthly basis. The negative base effects should help the headline year-over-year reading fall from 4.9% to 4.1%. Core inflation from a month ago could soften from 0.4% to 0.3%, while the annual reading is expected to drop from 5.5% to 5.2%.
US Dollar
The US dollar rebounded as the GBP/USD weakened, as investors may have priced in too much tightening by the BOE. BOE’s Mann noted that inflation expectations are now on the downswing. The USD/CHF also softened as a risk-on mood on Wall Street dented demand for safe havens.