The latest batch of data from the world’s largest economy failed to impress, suggesting that investors continue to discount President Trump’s reflation trade. The Fed’s favourite gauge of inflation, the core personal expenditure, slid to its lowest level since 2015 as it printed at 1.5% y/y in April, matching median forecast, but down from 1.6% in the previous month.
We do not share the view of many market participants who argue that this weakness is transitory and that a rebound is looming. The relative encouraging developments in personal income and spending - both up 0.4% m/m in April - are not enough to switch to a more enthusiastic mood.
Again this softness in inflation does not jeopardise a June rate hike by the Federal Reserve. However, the central bank may have to reconsider the pace of tightening beyond the June meeting. The upcoming job report - that is due for release on Friday June 2nd - will be key in assessing the timing. Indeed, a solid print in wage growth could bolster expectations for further rate hike in 2017. Average hourly earnings are expected to have risen 2.6% y/y in May, up from 2.5% in April. We think that the market does not know which way to go.
On the one hand, the ECB’s dovishness took a lot of steam out of the EUR momentum, while on the other hand, the softness of US data puts into question a recovery in the USD. EUR/USD is currently trading at around 1.1175 with a downtrend bias.
(By By Arnaud Masset)