The US Consumer Price Index (CPI) report yesterday provided some relief to the market when the latest reading showed inflation was still under control, thus maintaining expectations that the Federal Reserve (Fed) has the potential to cut interest rates in September.
Although there are signs that core inflation (Core CPI) is strengthening with the fastest increase since January, the market sees it not yet hot enough to prevent policy easing.
This time the CPI data showed that the price of goods only increased slightly, allaying concerns that cost pressures from the new tariffs will spread more widely to consumer prices.
For analysts, the focus is now more on the slowdown in the labor market, especially after the revised employment data showed significant weakness. This situation strengthens the argument for what is being called a “certain interest rate cut” of 25 basis points in September, although the Fed has not yet made a formal commitment.
Next, the market will turn to the US retail sales report due out on Friday, which will be a key indicator of the strength of consumer spending.
The data will be a key indicator of whether the optimism of major companies throughout the earnings season is justified, or not. It confirms concerns about slowing household demand.
If the momentum in retail sales continues to weaken, pressure for the Fed to make a bigger cut, perhaps as much as 50 basis points as some in the administration have suggested, will increase.
The US dollar was trading flat in the Asian session after falling 0.4% in the previous session, as investors await retail sales data and geopolitical developments from the Russia-Ukraine conflict.
Although the dollar's demand for a safe haven has recently increased, interest rate expectations remain the main factor driving the market. The Treasury bond market is also in a narrow range, with traders bracing for potential volatility after key data releases this week.
In political developments, President Donald Trump again criticized Fed Chairman Jerome Powell, even hinting at legal action over the issue of the allegedly excessive cost of repairs to the Fed headquarters building.
Treasury Secretary Scott Bessent said that if the Fed had received earlier access to “raw” data, it would have likely cut interest rates in June or July, and he also said a 50 basis point cut in September would be worth considering.
With the CPI data out of the way and expectations of a rate cut still intact, all eyes are now on the US retail sales report. A strong reading could ease speculation of policy easing, lifting the dollar and bond yields.
However, if the retail sales figure disappoints, it will almost certainly reinforce the case for more aggressive easing and increase investor appetite for riskier assets.
