Why the market is so confident the Fed will skip hiking rates in June despite the CPI risk

[forex4you]

Why the market is so confident the Fed will skip hiking rates in June despite the CPI risk

Trading US CPI on Tuesday will be particularly tough because it comes the day before the FOMC decision. With the market pricing in just a 25% chance of a hike, it would take an enormous beat on expectations to flip the script.

A big reason why the market is so confident that the Federal Reserve will skip a meeting is because year-over-year CPI in May is destined to plunge.

This report laps the May 2022 report of +0.9% m/m inflation, meaning that number will fall out of the calculation. That will put tremendous downward pressure on the y/y number and the consensus is 4.1%, from 4.9%. Even a beat with 4.2% or 4.3% would continue to show a firmly downward trend and the highest economist estimates are at 4.3%. This isn't a wildly volatile number and economists have a good grip on where it will be, so a 4.4% reading or higher is decidedly unlikely.

In the bigger picture, I continue to love this illustration of the path of inflation based on upcoming m/m readings.

This month's reading is expected at 0.2% m/m and that's going to be the limit of what the Fed can tolerate for awhile.

What makes it even tough for the Fed to make a true dovish pivot is that core inflation is running high and a dip in gasoline or food prices won't have any effect.

Core hasn't printed below 0.3% since August 2021 and this month is expected at +0.4%.

So while the market is excited about rapidly-falling CPI for May/June, there's a good argument for thinking about what inflation will be in December instead. That's the question the FOMC is wresting with and as the stock market hits a 52-week high, they're likely to conclude that more needs to be done.

For more of what's expected from the CPI report, see the economic calendar.

                This article was written by Adam Button at www.forexlive.com.

Source: Why the market is so confident the Fed will skip hiking rates in June despite the CPI risk

forexlive.com