Hot CPI Could Force Hawkish Repricing

Good morning! Here’s the latest in trending:

Tensions flare up: Iran targets American bases in Gulf nations in response to U.S. retaliatory strikes.

Mega IPO: SpaceX (SPCX) is said to draw over $250B of investor demand, eclipsing its $75B target.

Safety first: Anthropic (ANTHRO) releases new Mythos-class AI model that is “safe for general users.”

Markets are gearing up for the next big economic snapshot, with the Consumer Price Index report for May due this morning. Energy prices, elevated from the Iran war, will continue to exert upward pressure on the CPI, while the core CPI number is expected to show a more measured increase.

What to expect: Economists expect the CPI to rise 0.5% M/M in May, slowing slightly from the 0.6% increase in April. On a year-over-year basis, the CPI is projected to advance 4.2% from 3.8% in the prior month. The Cleveland Fed Inflation Nowcasting model puts May CPI at 0.46% M/M and 4.2% Y/Y, in line with the consensus. Excluding food and energy, which can swing widely from month to month, core CPI is expected to climb 0.3% M/M, a tick slower than the 0.4% advance in April. Y/Y, core CPI is projected to rise 2.9%, a touch hotter than the 2.8% increase in April. The Cleveland Fed model sees core CPI at 0.23% M/M and 2.82% Y/Y, slightly cooler than consensus estimates.

Rate outlook: “We are going to see a significant bump in the CPI headline that is expected to bring us up to about 4.2% Y/Y,” Dan North, senior economist at Allianz Trade North America, told Seeking Alpha. By contrast, February’s headline CPI was up 2.4% Y/Y. “That’s a pretty stiff dose of price increases for the consumer to take,” North said. Stubbornly high inflation is bad news for those who expected interest rate cuts when the year began, especially after last week’s stronger-than-expected jobs report. The upward pressure on inflation has erased the potential for rate cuts this year, North said, asking, “If you’re the Federal Reserve, why in the world would you try and poke that inflation dragon and awaken it to roar forward again?” Indeed, the odds of a rate hike have risen – there’s now a 43% chance of a 25-basis point hike by year-end and 21% odds of a 50-bp hike.

SA commentary: Investing Group Leader Mott Capital Management noted that markets are starting to price in higher rates. “A hotter-than-expected CPI report would likely reinforce that view and could force investors to further reprice the expected path of monetary policy. Conversely, a softer reading could ease fears that inflation is becoming entrenched and provide some relief to risk assets,” they added. SA analyst Agar Capital believes the largest risk factor is the core CPI reading. “If it starts running at 0.3% or 0.4% M/M, or worse, that would suggest inflation is moving beyond energy and geopolitics and creeping into the categories the Fed cares about most: services, rents, wages, and underlying demand,” they said. “In my view, we are beginning to see the Fed’s ‘dovish’ thesis start to lose momentum.”

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Demand for Lockheed’s (LMT) Patriot missiles outpaces supply.

Solar overtakes coal in U.S. electricity mix for the first month ever.

Today’s Markets

In Asia, Japan -1.9%. Hong Kong -0.6%. China -0.4%. India +0.1%.
In Europe, at midday, London -0.5%. Paris -0.3%. Frankfurt -0.7%.
Futures at 6:30, Dow -0.7%. S&P -0.8%. Nasdaq -1.3%. Crude flat at $88.23. Gold -2.3% to $4,189.60. Bitcoin -2.2% to $61,296.
Ten-year Treasury Yield +1 bp to 4.53%.

On The Calendar

Companies reporting today include Oracle (ORCL) and Chewy (CHWY).

See the full earnings calendar on Seeking Alpha, as well as today’s economic calendar.