US inflation in May came in below market forecasts for the first time this year. As a result, hopes for a September rate cut by the Fed were revived just days after an excellent labour market report. The FOMC meeting did not shake market optimism. The S&P500 was setting all-time highs; US Treasury bonds rose to their highest price of the year, and the US dollar collapsed. The EUR/USD was lifted above 1.08 again.
US CPI inflation slowed in May from 3.4% to 3.3% y/y. Consumer prices did not increase compared to the previous month. That was the first such figure in almost two years. The core index, which is crucial from the point of view of the timing of the first rate cut by the Fed and the outlook for the dollar, came in at 0.2% m/m. Holding this value in the medium term is sufficient to meet the inflation target. The annual growth rate of core inflation fell from 3.6% y/y to its lowest level since September 2021 at 3.4% y/y.
The Federal Reserve kept the cost of money in a range of 5.25-5.50 %. Interest rates in the US were last changed in July last year, raising them for the eleventh time in the cycle and to the highest level in more than two decades. The next move by US central bankers will be a cut. At the start of the year, investors assumed that monetary easing would begin as early as March and that the Fed would give the signal for cuts to the other monetary authorities in developed economies. Persistent core inflation and good economic conditions stood in the way of such a scenario.
The first possible cut date in the US has been postponed to the year's second half. FOMC members this spring clearly communicated that, after a series of unpleasant inflationary surprises, they needed more time to regain confidence in the permanent extinction of price pressures. Data successively ruled out cuts in May, June and July, but a cut at the meeting on 18 September still cannot be crossed out. The new projections of the optimal level of interest rates in the eyes of FOMC members for 2024 already assume only one cut, whereas in March, they suggested as many as three cuts. However, the scale of the revision to the projections is not a shock. One cut has been pushed back to 2025 by making the median indication of policymakers move from just 3.875 to 4.125%.
The Fed's next steps will remain fully determined by the information coming out of the economy. Market expectations in the process are very jittery and volatile. Reading after reading, investors are losing and regaining hope for post-summer break easing. After Friday's excellent labour market report for May, the valuation of the probability of a September cut dropped from more than 60% to less than 45%. After the low inflation reading and the FOMC meeting, it returned above 50%. A tug-of-war is underway, creating chaos in currency and bond prices. Similar conditions may persist until confidence in the Fed's immediate policy outlook crystallises. On a broader horizon, we continue to maintain a negative outlook on the US dollar. Fading inflation and a weakening labour market will repeal the gateway to interest rate cuts, and the current cycle valuation - in contrast to the ECB's intentions - can hardly be seen as exorbitant. As a result, by the end of the year, the USD/PLN exchange rate should fall towards 3.85 as the EUR/USD gradually rises above 1.10.
This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.
US inflation in May came in below market forecasts for the first time this year. As a result, hopes for a September rate cut by the Fed were revived just days after an excellent labour market report. The FOMC meeting did not shake market optimism. The S&P500 was setting all-time highs; US Treasury bonds rose to their highest price of the year, and the US dollar collapsed. The EUR/USD was lifted above 1.08 again.
US CPI inflation slowed in May from 3.4% to 3.3% y/y. Consumer prices did not increase compared to the previous month. That was the first such figure in almost two years. The core index, which is crucial from the point of view of the timing of the first rate cut by the Fed and the outlook for the dollar, came in at 0.2% m/m. Holding this value in the medium term is sufficient to meet the inflation target. The annual growth rate of core inflation fell from 3.6% y/y to its lowest level since September 2021 at 3.4% y/y.
The Federal Reserve kept the cost of money in a range of 5.25-5.50 %. Interest rates in the US were last changed in July last year, raising them for the eleventh time in the cycle and to the highest level in more than two decades. The next move by US central bankers will be a cut. At the start of the year, investors assumed that monetary easing would begin as early as March and that the Fed would give the signal for cuts to the other monetary authorities in developed economies. Persistent core inflation and good economic conditions stood in the way of such a scenario.
The first possible cut date in the US has been postponed to the year's second half. FOMC members this spring clearly communicated that, after a series of unpleasant inflationary surprises, they needed more time to regain confidence in the permanent extinction of price pressures. Data successively ruled out cuts in May, June and July, but a cut at the meeting on 18 September still cannot be crossed out. The new projections of the optimal level of interest rates in the eyes of FOMC members for 2024 already assume only one cut, whereas in March, they suggested as many as three cuts. However, the scale of the revision to the projections is not a shock. One cut has been pushed back to 2025 by making the median indication of policymakers move from just 3.875 to 4.125%.
The Fed's next steps will remain fully determined by the information coming out of the economy. Market expectations in the process are very jittery and volatile. Reading after reading, investors are losing and regaining hope for post-summer break easing. After Friday's excellent labour market report for May, the valuation of the probability of a September cut dropped from more than 60% to less than 45%. After the low inflation reading and the FOMC meeting, it returned above 50%. A tug-of-war is underway, creating chaos in currency and bond prices. Similar conditions may persist until confidence in the Fed's immediate policy outlook crystallises. On a broader horizon, we continue to maintain a negative outlook on the US dollar. Fading inflation and a weakening labour market will repeal the gateway to interest rate cuts, and the current cycle valuation - in contrast to the ECB's intentions - can hardly be seen as exorbitant. As a result, by the end of the year, the USD/PLN exchange rate should fall towards 3.85 as the EUR/USD gradually rises above 1.10.
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