Cool As A Cucumber CPI Cements The Bull Case

WHERE WE STAND – As cool as you like.

Sadly, that’s not a description of your scribe, but instead of yesterday’s US CPI figures, which were surprisingly benign across the board, as upside price pressures from the pass through of tariffs remains elusive – for now.

Headline CPI rose just 0.1% MoM in May, with the core CPI figure rising by an identical magnitude, equating to YoY increases of 2.4% and 2.8% respectively. Not only were these figures below expectations, but the details of the report were also surprisingly cool. Core goods prices rose just 0.3% YoY, hardly evidence of tariff costs being passed on, while core services prices held steady at 3.6% YoY. Furthermore, 3-month annualised CPI is now running at just 1.0%, with the 3-month annualised core CPI figure at 1.7%; both, obviously, considerably below the Fed’s 2% target.

Before anyone gets too excited about rate cuts, though, this report changes nothing for policymakers, with the FOMC still set to stand pat next week, and in fact still likely to be on the sidelines until the fourth quarter at the earliest. Numerous upside price risks remain, with the full impact of tariffs on consumer prices only to become clear through the summer. The direction of travel for rates remains lower, but the FOMC – rightly – won’t be in a rush to resume that journey any time soon, especially as the labour market remains resilient too.

Besides inflation, we had yet more fallout from the US-China trade talks yesterday. We remain short on details on this front, however, with China simply noting that they had held “candid and sincere” talks with the US, and President Trump stating that the “deal with China is done”, but providing little clarity beyond a Truth Social post noting that rare earths will “be supplied up front”.

Frankly, the details don’t really matter much, as silly as that may sound. The important facet for markets is that there is nothing escalatory in the rhetoric coming from either side, that calmer heads continue to prevail, and that the path remains away from ‘peak chaos’,  instead pointing towards deals being done.

Adding together ‘goldilocks’ US economic data, and the much cooler tone on trade, while also sprinkling on top solid earnings growth, you have a very potent cocktail indeed for the risk rally to roll on for the foreseeable. Stocks traded higher for most of yesterday, before geopolitical jitters drove some selling late-on. Still, that in itself is a classic dip buying opportunity, and the above logic on top of that leaves fresh record highs on Wall Street as now a question of ‘when’ not ‘if’.

Back to that inflation data, unsurprisingly the cool figures allowed Treasuries to rally across the curve, as money markets reverted back to fully discounting 2x 25bp Fed cuts by year-end (in Oct & Dec). On that pricing, my view remains that the 50bp of cuts price by year-end is too dovish given the FOMC’s resolute ‘wait & see’ stance, but also that the 100bp of cuts priced from now to the end of 2026 is too hawkish, considering that J-Pow’s replacement next May is likely to be an uber-dove ‘yes man’.

These gains were ably helped along by a solid 10-year auction, which stopped through the when-issued by 0.7bp. Yet again, we’ve seen 4.5% on the 10-year, and 5.0% on the 30-year prove attractive levels for dip buyers to enter the fray, with the bulls likely to remain in command for the time being, providing today’s 30-year supply is digested well, and that fiscal worries remain on the back burner.

On the fiscal front, there was a notable story doing the rounds yesterday that pension managers in Hong Kong are formulating plans to potentially cut their Treasury holdings, if the US loses its AAA rating granted to it by Japan’s ‘Rating & Investment Information’. Setting aside the slightly random nature of the agency stipulated here, this plan smacks of the funds shooting themselves in the foot. If anyone reckons that holding Bunds is safer than holding Treasuries, no matter what the ratings folk say, then I have a bridge for sale.

Closer to home, Chancellor Rachel Reeves delivered the ‘Spending Review’ in the Commons yesterday, which wasn’t exactly a thrilling watch. Reeves confirmed that defence spending would rise to 2.6% of GDP by next year, in keeping with the broader global theme of countries continuing to increase spending on security. Defence stocks, hence, remain a very solid bet indeed.

Reeves also boasted that we’re “starting to see” the results of her policy choices. Indeed, we are, with 276,000 jobs having vanished from the UK economy since our esteemed Chancellor announced the Budget last autumn.

Anyway, Reeves’s remarks weren’t especially market-moving for the quid, though the day was dominated by broad-based USD weakness across the G10 board. Again, this isn’t surprising considering the soft inflation data, but what was again notable was the manner by which recent ranges remained so well-respected.

Unless and until these familiar trading bands break, there will likely be little worth getting excited about in the G10 FX complex.

LOOK AHEAD – A lighter docket today, and I’d imagine that participants’ attention is already turning to next week’s bonanza of central bank meetings, with the FOMC, BoJ, BoE, SNB, Riksbank & Norges Bank all on deck.

Back in the ‘here and now’, we get the latest UK GDP figures this morning. The economy is set to have contracted 0.1% MoM in April, largely a result of the host of one-off factors which supported the March print (tariff front-running, folk attempting to beat the stamp duty hike, etc.) are unwound. Given how volatile the monthly GDP series is, however, and the ever-unreliable nature of the ONS, I shan’t be placing much weight on the data.

Stateside, all eyes will fall on this afternoon’s 30-year bond auction, with $22bln due to be sold, even if yesterday’s cool inflation print has reduced some degree of risk around the sale. We also get the latest US PPI and jobless claims reports this lunchtime.

Finally, a frankly ridiculous 8 ECB speakers are due to make remarks through the day, though all should reiterate the now-familiar view that the easing cycle is, probably, at an end, unless external factors force the Governing Council’s hand.