US CPI for May was a nightmare for risk markets as the headline came in well above the consensus. Inflation is back on the highs; critically, it is across the board.

Just education services were negative at -0.1%. The Fed’s policy is influencing financial conditions- the housing market is slowing in terms of mortgages written and sales volume dropping, but that is not yet hitting inflation data where the housing component was still up 0.8%.

The Fed needs to see the non-energy sectors of the economy slowing – i.e., those segments it “should” be able to influence. There is not much sign of that in the data, and it is the second-round effects that are coming through loud and clear.

A 50bp rate hike from the Fed this Wednesday was a done deal in any case, so this data is not an immediate policy influence. Instead, what it does is cement the September 50bp hike.


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The sizable CPI beat and hawkish ECB are reminders that elevated inflation will continue to compete with the slowing growth narrative.

The immediate reaction in markets to the hot CPI print was to worry the Fed would be forced into a more aggressive rate path that would end up hitting growth much harder.

For the last few weeks, there has been a cautious calm in markets – rates not pricing anything unforeseen, and equities able to make small gains. But the strength of CPI completely upended that apple cart.

The market is now thinking much more about the Fed driving rates sharply higher to get on top of inflation and then having to cut back as growth drops. Indeed, this will leave rates traders and hence stock market investors deliberating how much further tightening central banks’ will be able to deliver and, therefore, how much higher yields can go from here. And we all know nothing ever good happens when interest rate volatility spikes in capital markets.

The S&P e-minis finished down 2.76% on the day, all related to CPI, while hard landing concerns fueled the US dollar freight train.

A string of central banks beating market rate hike expectations last week fostered concern around a ‘hard landing’ and has weighed on risk, with equities tanking and the USD aggressively bid in tandem. Hence the safe-haven USD was again considered the cleanest dirty shirt in the laundry basket, especially after US front-end rates went through yet another “horrific for risk” Fed hike repricing. The next three meetings are now pricing 54.6bp, 59.4bp and 51bp of hikes, respectively. Surely, we are not going to start aiming for 75bp.

This week’s FOMC meeting should have been a sideshow with a 50bp rate hike a done deal. The only issue is how far members wanted to push up their dots for terminal rates, but the US CPI has opened up a fresh can of rate hike complexity that will be difficult for the stock markets to digest over the short term.

The dots are going to be important, but the key is going to be Powell’s guidance. At the last meeting, he said there would be “a couple” more 50s. After CPI, one assumes (the market does, anyway) there are at least three more 50s to come, so Powell’s guidance into next year will be critical.

In summary, Fed tightening expectations hit fresh highs. Clouds are forming again on the China Covid reopening horizon. The market remains sensitive to headlines and vulnerable to positioning imbalances as investors’ willingness to buy the dip remains low, and liquidity remains challenging.

A hawkish ECB and hotter-than-feared CPI report have the rate hike stew bubbling over and with no sign of s of re-grossing as Hedge Funds hammered the sell button and added short hedges post CPI.


Oil traded lower as Fed tightening expectations hit fresh highs driving recession fears to multi-storey levels amid Clouds forming again on the coronavirus reopening horizon in China. Indeed, the stronger greenback and stagflation fears proved to be the bullish market’s undoing.

China remains the significant near-term downside risk, but most view the gradual normalization of Chinese demand as a powerful positive for oil despite the potential for lockdown noise in the coming weeks as current demand is far from reflecting normal conditions.

The approach of the peak US driving season is keeping the focus on tight global oil and product markets, and Brent remains near the top of the recent range despite the concerns about China and recession. Indeed, oil prices work in a vacuum relative to other risk assets.


The precious metal saw some volatility following the US CPI print. Still, colossal dip-buying was prevalent as investors rushed to cover both inflation and recession risk thinking gold could provide a safe harbour against stagflation risks clouding the horizon even while the US dollar soared and 10 Y UST settled at 3.165% +.008 on the day.


USDJPY, once again, topped out in the 134.50 zone overnight on the back of a combination of interest to sell cross JPY and the joint written statement issued by the Band of Japan (BoJ), Ministry of Finance, and Financial Services Agency. The statement is a step up from the usual verbal intervention from Finance Minister Suzuki. For now, the market will likely take this to mean the 2002 135.00/20 high is an initial line in the sand for Japanese officials.

Central bankers’ reaction function has changed globally towards preventing high inflation rather than stabilizing the economy, which will eventually apply to the Bank of Japan.

But the market is not in line with that view yet, thinking the BoJ is unlikely to tighten the policy despite the JPY depreciation and the next governor after Kuroda, either current deputy governor Amamiya or former deputy governor Nakaso, will not rush to start policy normalization next year.

Originally published by Stephen Innes, Managing Partner, SPI  ASSET MANAGEMENT