May's Inflation Number Brings Relief to Markets and Federal Reserve

Strategic Insights -

The US CPI report released on Wednesday showed an increase in inflation rates for May, but below market expectations, bringing relief to the White House, Wall Street, and Jerome Powell. The report suggests that tariffs have not yet affected consumer prices, with Eric Teal, Chief Investment Officer for Comerica Wealth Management, stating that companies are cautious about passing on price increases. This development has led to speculation about the potential for the Federal Reserve to cut interest rates, with some experts predicting a rate cut in July, while others expect it to be as late as October.

Key Takeaways:

  • The US CPI report showed an increase in inflation rates for May, but below market expectations, which is seen as a positive sign for the economy.
  • Tariffs have not yet affected consumer prices, with Eric Teal stating that companies are cautious about passing on price increases.
  • The Federal Reserve's tone could soften next week due to peak hawkishness, with David Russell, Global Head of Market Strategy at TradeStation, saying that the door to a July rate cut is inching open again.
  • Fed officials have delayed cutting the benchmark interest rate due to concerns about tariffs increasing consumer prices.
  • The market continues to price in two Fed cuts in 2025, with Madhavi Arora, Chief Economist, Emkay Global Financial Services, stating that the probability of a cut next week is literally zero.
  • The 90-day pause on reciprocal tariffs may be extended for nations demonstrating "good faith" in trade negotiations.
  • Powell has been categorical that the Fed will cut rates only based on incoming data, and the risk of inflation coming back because of tariffs is keeping him away from the rate cut.
  • The FOMC meeting next week will release a summary of economic projections, including a Fed dot plot showing rate cut expectations for the year ahead.

Statistics:

  • The US CPI report showed an increase in inflation rates for May, below market expectations.
  • The tariffs have not yet affected consumer prices, with 10% tariffs being prevalent on goods imported into the US.
  • The market continues to price in two Fed cuts in 2025.
  • The probability of a cut next week is literally zero, with the next cut expected in October.
  • The 90-day pause on reciprocal tariffs may be extended for nations demonstrating "good faith" in trade negotiations.

Sources:

  • Comerica Wealth Management
  • TradeStation
  • Emkay Global Financial Services
  • BOK Financial
  • deVere Group
  • IE Online Media Services Pvt. Ltd.
  • Contify.com