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Week Ahead: Has US inflation (and the dollar) peaked?

Vantage Updated Sun, May 8 01:26
Week Ahead: Has US inflation (and the dollar) peaked?

The highlight of the week will be the US CPI data released on Wednesday. Although the FOMC targets the PCE figures rather than this release, these numbers are still important to monitor as one of the timelier gauges of price pressures at present. The April print is expected to mark the first print in a long time which on a year-on-year basis will be decelerating compared to the prior month.

Many economists hope that inflation may now be past its peak. But the fall back to target is set to be slow and protracted. Geopolitical tensions and China’s zero-Covid strategy remain and will continue to add pressure to supply chains. The tight labour market, as confirmed by Friday’s latest non-farm payrolls data, may also put upward pressure on wages. These labour costs are being passed onto customers so making for sticky inflation.

The dollar should remain well supported, although the pause in bullish momentum at long-term resistance is notable. In fact, with markets already pricing in the Fed funds target rate near the upper end of the neutral range of 3%, periods of major gains for the greenback may be harder going forward. That said, further sharp falls in equity markets will boost the buck’s haven status.

A battered pound suffered a third week of sharp declines, losing over 6%. The UK GDP data is forecast to bounce in the first quarter. But this will mask softer performance in March, increasing concerns about slowing growth. Market pricing for rate hikes by the Bank of England still remain elevated, with around 75bps baked in for this year. The mid-1.22 support zone in cable has little below it, with round numbers offering psychological floors.

Major risk events of the week

10 May 2022, Tuesday:

German ZEW Investor Survey: Investor sentiment fell by less than expected last month as a drop in inflation expectations gave some cause for hope about the outlook for the German economy. But analysts say the indicator is expected to remain at a low level with the prospect of stagflation over the next six months remaining.

11 May, Wednesday:

US CPI: Consensus expects April inflation to edge lower to 8.1% from the multi-decade high of 8.5% in March. The core is seen falling to 6.1% from 6.5%.  Lower gasoline prices will help, as will a drop in second-hand car prices. But it will be a long, slow decline to get back to the Fed’s 2% target.

12 May 2022, Thursday:

UK GDP: Analysts expect the economy to have eked out some growth, with the 0.1% estimate and drivers looking broadly like those in February. They forecast first quarter growth of +1.0%. Services output growth stayed moderately positive. But manufacturing may have contracted again.

13 May 2022, Friday:

University of Michigan Survey: Consensus sees a reading of 68.1 for the Conditions print and 63.7 for the Sentiment preliminary figure. Equity market weakness may start to hit consumer confidence. The increasing cost of living are looks set to weigh on sentiment going forward.