US Inflation Meets Expectations While Retail Sales Stagnate

US Inflation Overview: In April, US inflation as indicated by the Consumer Price Index (CPI) softened to 3.4% year-over-year, aligning with market forecasts, and marking a slight decrease from 3.5% in March. This adjustment reflects ongoing shifts in consumer pricing pressures.

Core CPI Analysis: The core CPI, which excludes the often-volatile categories of food and energy, also decreased to 3.6% from a previous 3.8%, meeting expectations. This moderation suggests that underlying inflationary pressures, while still present, are beginning to ease.

Monthly CPI Changes: Both the overall CPI and core CPI saw a monthly increase of 0.3%. Key drivers for this rise included the shelter and gasoline indices, which together accounted for more than 70% of the total monthly CPI increase, highlighting the significant impact of housing and fuel costs on overall inflation.

April Retail Sales: Retail sales were flat (0.0%) in April, significantly underperforming against expectations of a 0.4% increase. Sales excluding both autos and gas dropped by 0.1%, marking it as one of the weakest performances of the year.

Consumer Behavior Insights: Missed expectations suggests a potential slowdown in economic activity. The stagnation in retail sales also suggests that consumers might be pulling back due to higher prices, potentially altering their spending habits in response to ongoing inflation pressures.

Market Reaction: Following the release of the inflation and retail sales data, the US Dollar experienced a downturn, reflecting investor reactions to steady inflation figures, as markets adjusted their expectations for future Federal Reserve actions regarding interest rates.

Federal Reserve Expectations: The market has adjusted its outlook, now anticipating around 50 basis points of rate cuts by the end of the year, an increase from the previous expectation of 45 basis points. This adjustment is based on the recent CPI data and the underperformance in retail sales.

Implications for Risk Assets: The alignment of CPI with forecasts and the anticipation of rate cuts are expected to boost risk sentiment. This environment should favour risk assets such as stocks, cryptocurrencies, and commodity-based currencies.

Upcoming Economic Indicators: The market’s optimism could be tested by upcoming economic data, such as US jobless claims released tomorrow. Any unexpected shifts in such data could impact the current positive sentiment towards risk assets.

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