Core CPI Data Softer than Expected

INTEREST RATE MARKET FUTURES

Treasury futures were higher at the front end of the curve and fell lower at the long end. Treasurys were down sharply on Monday as the temporary trade deal between the US and China spurred a risk-on sentiment that led to a sell-off in the Treasury market.

The US CPI inflation data for the month of April came in weaker than expected, with a core CPI reading of 0.2% month-over-month, where economists expected an increase of 0.3%. Consumer prices were up 2.3% in April from a year earlier, the lowest reading since February 2021, while core prices were up 2.8% year-over-year in April, in line with expectations. Weaker-than-expected data is not a total surprise, as the effects of tariffs on prices most likely have not affected prices in April, as companies rushed to get imports in before the duties were set. May and June will likely be when inflation pressures from tariffs become more evident in the economy.

Markets are currently anticipating two 25 basis-point cuts this year, with the first rate cut coming in September. Markets were previously anticipating the first rate cut to come at the June meeting, but signs of an increase in near-term inflationary pressure have shifted expectations that the bank may hold rates steady for longer. More clues to the Fed’s monetary path will come Thursday as Fed Chair Jerome Powell is set to speak at 7:40 a.m. central time.

Federal Reserve Governor Adriana Kugler said Monday that the Fed is well positioned to respond to changes in the economy after the bank held rates steady at its meeting last week. Kugler said tariffs are likely to generate “significant economic effects” even if tariffs remain around the levels they are currently at.

The spread between the two- and 10-year yields is around 48 bps while the 10-year yield is around 4.46%.

STOCK INDEX FUTURES

Futures were relatively flat in overnight trade after finishing sharply higher on Monday. Stocks finished with their best day Monday since the beginning of March, driven by the US-China trade deal news. The tech-heavy Nasdaq surged by over 4%, driven by the positive impact of reduced tariffs on tech companies that manufacture and sell products in China. Strong earnings reports and trade deals with the UK and China have helped the S&P and Nasdaq recover all their losses since April 2^nd. Weaker-than-expected CPI data for the month of April may lend support to markets, as the readings could add to expectations for the Fed to cut rates in the near future.

The temporary trade deal with China sees tariffs on Chinese goods fall from 145% to 30%, while China cuts their tariffs on the US to 10% from 125%. The reductions will last for 90 days while negotiations continue. China has also agreed to suspend or cancel retaliatory, nontariff measures that could include export restrictions on critical minerals.

President Trump on Monday said that he plans to talk with Chinese President Xi Jinping “maybe at the end of the week.” Treasury Secretary Scott Bessent said that the 90-day pause could also be extended if there is a good faith effort to make a deal.

CURRENCY FUTURES

The June US dollar index was lower in the overnight session after the greenback surged on Monday, fueled by the trade developments between the US and China. A weaker-than-expected core CPI reading also pressured the greenback.

June British pound futures recovered some losses overnight after losing ground to the dollar Monday, where it touched one-month lows. The UK average earnings index grew by 5.5%, above economists’ expectations of 5.2%, while the unemployment rate remained unchanged at 4.5%. June British pound futures are trading around $1.32.

Bank of England policymaker Megan Greene said on Monday that wage and inflation measures were moving in the right direction but remained too high, citing rising public inflation expectations. The Bank lowered its benchmark rate last week in a vote that unexpectedly saw mixed results, as two votes were cast in favor of holding rates, while two votes were in favor of a 50 bps cut. The pound could gain support if the Bank indicates that future rate cut expectations are overdone.

Japanese Yen futures are higher following the overnight session after being weighed down by dollar strength. The Bank of Japan maintained its policy rate at 0.5% the other week and slashed its growth forecasts for the fiscal year ending March 2026. The bank will most likely hold rates steady for the foreseeable future as it awaits further economic data, keeping an eye on corporate earnings and inflation data.

Australian building approvals came in line with expectations at a month-over-month contraction of 8.8%. Both headline and core inflation in Australia have fallen back within the Reserve Bank of Australia’s 2%-3% target range. Conditions are now in place for the bank to cut rates further at its next meeting in a few weeks. The RBA official cash rate is 4.10%.

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