CPI Inflation Ticks Less than Expected

STOCK INDEX FUTURES

Stock index futures are higher, supported by May CPI inflation data, which showed inflation rose just below expectations.

US and Chinese officials agreed on a framework to put the Geneva trade truce back on track and resolve China’s restrictions on rare earth minerals and magnets. Representatives from the countries said the framework would essentially restore the pact they agreed to in Switzerland last month, pending approval from both President Trump and Xi. President Trump said on Wednesday the US deal with China is done, subject to final approval by him and President Xi, with Beijing to supply magnets and rare earth minerals while the US will allow Chinese students in its colleges and universities.

Meanwhile, a federal appeals court on Tuesday granted the Trump administration’s request to keep the president’s far-reaching tariffs in effect for now but agreed to fast-track its consideration of the case this summer.

In other news, it has been reported that the US and Mexico are negotiating a deal to reduce or eliminate the 50% tariff on steel imports up to a certain volume. A likely outcome of the agreement would include a quota arrangement, under which a specified volume of steel would enter the US either tariff-free or at a reduced rate, and any imports above that level would be subject to the 50% tariff.

The World Bank on Tuesday announced its forecast of US and Global GDP, saying both figures would slow as a result of tariffs’ effects on global trade. The World Bank now expects world output to grow by 2.3% this year and 2.4% the next, having previously projected an expansion of 2.7% in each year. It forecasts US GDP to grow by just 1.4%, half the rate the US economy grew in 2024.

Producer Price Index (PPI) inflation data will be released on Thursday, with month-over-month inflation expected to rise 0.2%. On Friday, the University of Michigan will publish its latest consumer sentiment index, offering further insight into public confidence in the economy.

Stock valuations are still relatively high by historical standards; the S&P 500 was trading at 22 times its expected earnings over the next 12 months as of June 6, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the current macro environment, which has seen central banks and private companies across the globe cut their growth forecasts due to the still-unfolding consequences of uncertain trade policies.

CURRENCY FUTURES

The USD index fell sharply following the release of May’s CPI inflation data, falling against most major currencies. Investors will monitor the 10- and 30-year Treasury Note and Bond Auctions today and Thursday for signals on foreign demand. If foreign investors are looking to reduce exposure to dollar-denominated assets, there is a chance they might not reinvest in new bonds. Weak demand at the auctions could put downward pressure on the dollar.

Euro futures are higher on dollar weakness. Policymaker Peter Kazimir said the central bank was nearly done with interest rate cuts and should watch data over the summer to determine whether more tweaks are necessary. ECB president Christine Lagarde said that the central bank is likely “getting to the end of the monetary-policy cycle.” However, the ECB President also noted that the bank is prepared to lower its key interest rate again if needed. The bank cut its benchmark interest rate by 25 bps to 2.00% last week. Markets are now pricing in only one more rate cut by the end of the year.

British pound futures are higher as the dollar fell steeply. New data showed the UK labor market cooled in the three months to April, with 89,000 new jobs added vs. a previous 112,000. Average weekly earnings excluding bonuses rose 5.2% from a year earlier, down from 5.5% in the previous reading. The unemployment rate climbed to 4.6% from 4.5% in the prior quarter, the highest since May-July 2021, as unemployment claims in May jumped to 33,100, well above the expected 9,100. Despite signs of a weakening labor market, policymakers are unlikely to lower interest rates at the June 19 meeting, as April’s inflation spike to 3.5% and growing global uncertainty continue to weigh heavily on their decision-making. Markets are still anticipating a rate cut in August.

Yen futures are higher, gaining support from a weaker dollar. Japan is considering buying back some super-long government bonds issued in the past at low interest rates in order to rein in the abrupt rise in bond yields. Yields on super-long Japanese government bonds rose to record levels last month due to dwindling demand from traditional buyers such as life insurers and global market jitters over steadily rising debt levels. The move would also come on top of a plan to trim issuance of super-long dated government bonds. A revised GDP reading saw GDP unchanged at 0.0% growth vs. a previous reading of a -0.2% contraction. Despite the upward revision, the result still reflects a sharp deceleration from the 0.6% growth recorded in the prior quarter.

Australian dollar futures are higher. Consumer sentiment rose for the fourth time this year, with the Westpac-Melbourne Institute Consumer Sentiment Index increasing by 0.5% month-over-month in June, down from a previous 2.2% rise in May. Meanwhile, business confidence improved, with the NAB Business Confidence Index rising to 2 in May from -1 in the previous month—turning positive for the first time since January and reaching its highest level in four months.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve after CPI data for May came in slightly softer than expected. Annualized CPI inflation rose at a rate of 2.4% in May, just below the expected 2.5% and above the previous reading of 2.3%, showing inflation ticked slightly higher. Monthly inflation grew by 0.1%, below the forecasted 0.3% and lower than the 0.2% rate it grew at in April. The readings reinforce the Fed’s wait-and-see approach to monetary policy, with the bank still expected to hold rates steady until its September meeting. Markets are expecting 50 bps of easing this year from the Fed, with the first rate cut coming at the September meeting.

Tuesday’s three-year treasury note auction was met with slightly weaker demand than expected, while foreign demand remained near the six-auction average. The three-year note fetched a yield of 3.972%, 0.4 bps above the expected rate, while the bid-to-cover ratio was 2.52, compared to the recent average of 2.62 ($2.52 in bids for every $1 of notes sold). Attention now turns to the 10-year Treasury auction at 12:00 p.m. CT.

Thursday will see a highly anticipated 30-year Treasury auction. This week’s Treasury auctions are drawing heightened attention as key indicators of market sentiment toward US assets. While investor demand has remained solid for short- and medium-term debt, interest in longer-term bonds remains uncertain. Bond markets recently have raised alarms about a lack of fiscal discipline worldwide. The added burden of tariffs is also expected to dampen global growth and pressure governments to increase spending. Investors are worried that an increase in bond issuance to finance government debts will outpace demand, hence the scrutiny over recent auctions. Recent trade policies, combined with the fiscal picture of the US debt, have caused worries in bond markets across the globe, causing investors to demand higher yields on bonds.

The 30-year auction will be closely watched for signs that bond investors may be putting their foot down and rejecting countries with huge fiscal deficits and mountains of debt.

The 10-year Treasury yield is 4.42%, and the 30-year yield is hovering around 4.90%. The spread between the two- and 10-year yields rose to 47 bps from 45 bps Tuesday.

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