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This Wednesday is set to be crucial for gaining economic insights, with several key reports and decisions lined up. In Wednesday night we will see the release of the May Consumer Price Index (CPI) report, followed by the June Federal Open Market Committee (FOMC) meeting in the Thursday morning. Additional data on the Producer Price Index (PPI), import prices, and the University of Michigan's consumer sentiment survey will also be unveiled.
Wednesday CPI
The Federal Reserve is expected to keep its interest rate steady for the seventh consecutive meeting. Attention will be on the Fed's forward guidance and the dot plot, which shows future rate expectations. There is speculation about an upward revision in the 2024 median forecast, suggesting the possibility of two rate cuts by the end of the year, instead of the previously projected three, along with an upward skew in individual rate projections.
FED Watch Tool
The CPI report will be pivotal in shaping the Fed's perspective. Current projections indicate a favourable trend, with inflation expected to decelerate. Specifically, the headline CPI is forecasted to rise by 0.1% year-over-year (YoY), down from 0.3% in April, with the annual rate decreasing to 3.3% from 3.4%. The core CPI, which excludes food and energy, is anticipated to increase by 0.2% month-over-month (MoM), a slowdown from 0.3% in the previous month, resulting in an annual rate of 3.5%, slightly lower than 3.6%. Source from NASDAQ: https://www.nasdaq.com/articles/cpi-ppi-inflation-reports-q2-earnings-await
If these predictions hold true, they could reassure the Fed that the robust economic performance in Q1 2024 is not persisting unchecked, indicating potential for further improvements. However, the May CPI report alone will not suffice for the Fed to immediately cut rates. Additional positive economic data will be necessary before considering any easing of monetary policy.
The May employment report presented mixed outcomes, with some unexpected results such as higher-than-anticipated Non-Farm Payrolls (NFP) and wage growth. Nevertheless, signs of cooling compared to April were evident. The NFP exceeded expectations at +272k, and Average Hourly Earnings (AHE) also surpassed forecasts. On the other hand, the household survey showed a significant drop in employment, widening the gap with the establishment survey and raising the unemployment rate to 4.0% from 3.9%.
Source: https://www.forex.com/en-us/news-and-analysis/us-cpi-fomc-boe-ecb-and-snb-on-tap-week-ahead-2023-12-07/
The Fed is likely to perceive the labour market as still strong, emphasizing the robust NFP and AHE figures. However, the discrepancy between the household and establishment surveys introduces some uncertainty regarding the accuracy of the data. The reality likely lies between these extremes, suggesting the labour market is neither as weak as the household survey indicates nor as strong as the NFP suggests.
Overall, the U.S. economy has demonstrated resilience with robust growth in the first half of 2023, which is expected to continue accelerating in the second half. However, this growth is unlikely to be sustainable. A slowdown is anticipated as we move into 2024, with growth expected to remain below trend but positive through mid-year. By the end of 2024, a delayed recession is expected to begin. In summary, Wednesday's reports and the Fed's decisions will offer crucial insights into the economic trajectory, influencing expectations and policy directions moving forward.
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