Dollar on the Verge of Collapse?

Macro Markets

CPI

The US Bureau of Labor Statistics (BLS) will release the most important inflation measure, the US Consumer Price Index (CPI) figures, today at 8:30 am EST. As we get closer to the release time, we will review forecasts by economists and researchers of 12 major banks regarding the upcoming United States inflation print for June.

Headline CPI decelerated to 4% year-on-year in May – and is expected to continue slowing down to 3.1% YoY in June. Core CPI remained stubbornly high, rising to 5.3% YoY, and expectations stand at 5% YoY for the upcoming release. In MoM terms, the headline is expected at 0.3% vs. 0.1% in May, and core is expected to have slowed to 0.3% vs. 0.4% in May.

Many estimates for the CPI report suggest core price inflation likely lost meaningful momentum in June: They expect it to print 0.2% MoM – the slowest monthly pace for the core since 2021. They also look for a similar 0.2% gain for the headline. Note that our unrounded core CPI inflation forecast is 0.23%, so we judge the risk of a 0.3% m/m advance to be larger than that of 0.1%. Their MoM forecasts imply 3.1%/4.9% YoY for total/core prices. (TDS)

Citibank projects that the US core CPI inflation should continue to slow more noticeably in June, with Citi Research forecasting a 0.256% MoM rise, the softest core increase since September 2021. This will likely spur further optimism around easing inflationary pressures in H2’23. The slowing in core CPI is likely to be a result of further easing in shelter prices (we forecast 0.47% owners’ equivalent rent and 0.50% primary rents) and a drop in used car prices (-0.8% MoM) – both of which should continue to imply easing core CPI over the coming months. However, this month, the divergence between core CPI and core PCE could be particularly noticeable.

JPMorgan traders broke down five scenarios for how the market might react to the report, depending on how much CPI increased from the prior year.

• 45% chance — CPI between 3% and 3.2%: This is the most likely outcome heading into the report, according to JPMorgan. “This outcome continues to support the disinflation narrative but is unlikely to move the Fed from hiking 25bps in July; but, it may be enough to remove further rate hike expectations for the balance of the year,” traders at the bank said. Under this scenario, the SPX would rise 0.5% to 0.75%.
  

• 25% chance — CPI between 2.8% and 2.9%: The S&P 500 would rally between 1.5% and 1.75% under this scenario. “We could see rate hike expectations for July fall; in our view, if you saw those expectations fall under 45%, then we may see the Fed capitulate and do another ‘hawkish skip’ since we would have seen inflation largely normalize before feeling the full effects of the tightening cycle,” JPMorgan’s trading desk said.
  

• 15% chance — CPI between 3.3% and 3.6%: “This scenario will do little to assuage concerns that the Fed ends its hiking cycle soon and would call into question inflation forecasts considering the expected rise to Energy prices this summer and a still strong consumer,” the traders wrote Monday. The S&P 500 would drop between 1% and 1.25% under this outcome.
  

• 10% chance — CPI at 2.7% or lower: Under this outcome, JPMorgan traders think a rate hike this month would be taken off the table, and the possibility of a rate cut in the fourth quarter would increase. The S&P 500 would rally 2.5% to 3%.
  

• 5% chance — CPI at 3.7% or higher: This outcome would spark a market sell-off of 2% to 2.5% in the S&P 500. That said, for this to occur, “we would likely experience a significant increase in core inflation, creating a worrying trend for the Fed. … Further, expectations for the Fed to do 50bps in July arise with some additional hikes priced in for the remaining meetings.” - JPM RESEARCH

We will break down the above probabilities concerning crypto in Weekly Musings.