Amid The Choppy Inflation Waters, There’s A Glimmer Of Hope

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Asian stocks rode the coattails of their US counterparts, rallying on the back of easing US consumer inflation expectations that have rekindled hopes for a Federal Reserve rate cut this year.

On Monday, markets in Hong Kong, China, Australia, South Korea, and Japan all saw gains. Meanwhile, US equity futures remained unchanged, taking a breather after recent volatility.

This wave of optimism followed a rough patch for Asian stocks, which experienced their worst week in over a month. The previous slump was driven by skepticism about the Fed’s willingness to cut rates this year and concerns over China’s property rescue package and its potential effectiveness.

In Japan, the yen strengthened against the dollar after former Bank of Japan (BOJ) official Takako Masai hinted that the central bank might raise interest rates to 0.50% by year-end. Simultaneously, BOJ Governor Kazuo Ueda adopted a stricter stance on inflation, prompting the market to consider the possibility of another rate hike this year, which could bolster the beleaguered yen. These remarks add significant weight to Friday's Tokyo inflation release and may, at the very least, curb further yen weakness above 157.25 early in the week.

Amid the choppy inflation waters, there’s a glimmer of hope, with Core price growth on the Fed’s preferred inflation measure likely dipping to a modest 0.2% last month.

At least, that’s what the high-paid soothsayers, otherwise known as economists, are predicting.

If the consensus on the month-over-month core PCE print holds, it would mark the slowest pace of 2024. But don’t expect to convert the flock of newly-minted hawks at the Fed, who now think that hinting at rate cuts earlier in the year might have given inflation a new lease on life.

On a year-over-year basis, core price growth likely ran at the same 2.8% pace last month as it did in March, according to our beloved economists. The macroeconomic narrative seems to change with the wind. Last week, the buzz was all about a slowdown thanks to a series of disappointing top-tier data releases. But come May 23, the markets were back on the “no landing” bandwagon after a buoyant read on services sector activity and a drop in jobless claims for the NFP survey week. So, who knows where the narrative will be heading into next week's key NFP

The anticipated price growth figures, due this Friday, will come alongside an update on personal spending, which probably ticked up 0.3% last month, according to forecasters. Cue the usual litany: Are Americans finally burning through their savings? Is the mountainous pile of credit card debt sounding an alarm? What about the rising delinquencies? And the list goes on. Remember, retail sales data for the same month was a big disappointment.

A day earlier, on Thursday, the BEA will unveil the second estimate of Q1 GDP. Everyone will scrutinize the consumption component for revisions; the same goes for the price indexes. But let’s be honest—the data’s already stale. Beyond the May 30 session, it’s unlikely to make much of a splash.

Also on the docket in the US during this holiday-shortened week: updates on two national home price gauges (Case-Shiller and FHFA), Conference Board confidence, and pending home sales. Fed speakers include Bostic, Cook, Kashkari, Logan, Mester, and Williams.

Elsewhere, preliminary inflation figures out of Europe are expected to show year-over-year price growth ticking up slightly to 2.5% in May, with core inflation likely holding steady at 2.7%. The ECB is gearing up for a cut next month.

China will release PMI data on Friday, and everyone—from markets to Western politicians—is laser-focused on Xi’s “two-speed” recovery. The sluggish domestic demand and rising industrial output threaten to create an overcapacity that could flood foreign markets and undercut local manufacturers.

Unfortunately for European and American manufacturers, this lightbulb moment came decades too late.

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