If May was a month that brought us that much closer to the Fed's "soft landing" soft landing, where jobs slumped and CPI came slightly below estimates (as we predicted), June has been a mirror image with last week's payrolls report coming in red hot (if one can claim that a 600K+ drop in full-time jobs is a red hot), and so all eyes will be on tomorrow's CPI print at 8:30am ET for the tie breaking vote, not least of all because it will come just hours before the Fed's 2pm ET decision (as a reminder, FOMC members already have the CPI report in hand, and are encouraged to update their forecasts up until mid/late morning). In other words, the CPI print will be very important.
What does Wall Street expect?
After a string of hot inflation reports in Q1 when all core CPI reads came in stronger than expected, last month's, April CPI, was the first to show some inflation progress return in 2024, something that Fed officials have acknowledged, but caveated they are not there yet. Fed's Waller noted in the wake of the data that it suggests progress towards the 2% target has likely resumed, but he admitted the progress was modest. This data will be used to help confirm if that progress is continuing, and at what pace, or perhaps stalling, or even reversing.
The hot inflation reports at the start of the year questioned whether the Fed has done enough to return inflation to target. The Fed largely toed the line that they will keep rates at the current "restrictive" level for a longer period of time, and that further rate hikes were not the base case. Nonetheless, some had opted to leave the options of rate hikes on the table in case inflation reaccelerated. Ahead of last week, money markets were fully pricing in two 25bp rate cuts from this year, however, the hot May NFP report saw these expectations ease with now just one rate cut fully priced. The CPI data will help either cement market expectations for one rate cut, or if it comes in on the soft side it will likely see markets start to price in two rate cuts with more conviction.
The data will also have implications for the FOMC rate decision due later on Wednesday (previewed earlier), which also releases its updated Dot Plots. Fed Chair Powell in December noted that "participants are allowed to, encouraged to update their SEP forecast until probably midmorning today", therefore some may revise their dot plots on the day of the FOMC after they see the CPI data.
Turning to the specifics of the report, in their CPI preview note (available to pro subscribers in the usual place) Goldman's economists expect a 0.25% increase in May core CPI (vs. 0.3% consensus), corresponding to a year-over-year rate of 3.50% (same as 3.5% consensus). The forecast is consistent with a 0.20% increase in CPI core services excluding rent and owners’ equivalent rent and with a 0.19% increase in core PCE in May.
Goldman highlights three key component-level trends it expects to see in this month’s report.
Car insurance prices will keep rising but the pace of increases will slow: Goldman forecasts a 1% increase in the car insurance component, compared to 1.8% in April and 2.6% in March.
Elsewhere in the report, Goldman expects a 3% pullback in airfares, reflecting lower jet fuel prices and declining prices in its real-time measure of airfares. The bank also expects a 1.1% increase in used car prices, reflecting higher auction prices in May
Going forward, Goldman expects monthly core CPI inflation remain in the 0.2-0.3% range for the next few months before settling around 0.2% by end-2024. The bankers see further disinflation in the pipeline in 2024 from rebalancing in the auto, housing rental, and labor markets, though expect offsets from catch-up inflation in healthcare and car insurance and from single-family rent growth continuing to outpace multifamily rent growth. Goldman forecasts year-over-year core CPI inflation of 3.5% and core PCE inflation of 2.8% in December 2024.
In terms of the market’s reaction function, Goldman trader Lee Coppersmith is out with a note (also available to pro subs) in which he makes the following market reaction prediction:
The straddle-implied move for tomorrow is 1.00, up modestly from last month's expectation of a 0.95% move and notably higher from the January's 0.70% move on CPI day; this is also the highest since November, but generally on the low side over the past two years.
Looking at some additional thoughts from around the Goldman trading desk, the consensus is “cautiously optimistic” even as the bank likes "replacing equity length with call spreads"
A quick look at JPMorgan finds the largest US bank somewhat on the hawkish side: the bank's chief economist Michael Feroli sees headline MoM CPI printing +0.2%, above the Street's 0.1%, and sees Core MoM printing +0.33%, above the Street’s +0.3% estimate (market fixings imply ~0.26% increase). On a YoY basis, he sees headline inflation of 3.4% (vs. 3.4% in previous print), aligned with the Street, and he sees core inflation of 3.6% (vs. the Street at 3.5% and 3.6% in the previous print).
JPM's market intel desk is likewise ready with its own analysis (link here for pro subs), and also looks at core CPI as the key variable to 1-day SPX moves. That said, with CPI and Fed on the same day there is a possibility of a CPI outcome being reversed by Powell’s press conference.
We conclude with the view from JPM's market intel team, which is even more "tactilcally bullish" than the Goldman trading desk (and thus, even more opposed to the pessimism that JPM's Marko Kolanovic continues to sell week after week ever since late 2022).
More in the preview folder available to pro subscribers in the usual place.