US Watch: May CPI inflation: An in-line CPI but always remember to read the fine print for PCE

Research evidence excerpt

US Watch: May CPI inflation: An in-line CPI but always remember to read the fine print for PCE

Rates: little change to Fed expectations

Following the print, the UST curve steepened and market pricing for Fed path fell 3bps

by mid ’27. Market is pricing roughly one 25bps hike by the end of the year and a

cumulative of just less than 40bps of hikes through mid ’27. Front-end breakeven

inflation is lower with the index coming in below the May fixing.

While lower goods prices and cooler core services ex-rent is some reprieve from hawkish

fears, this is not enough to materially alter distribution of risks around Fed path. We

continue to see risks skewed to higher front-end rates and inflation compensation. Our

expected CPI profile in coming months is above market pricing. This should favor a

higher and flatter CPI curve and help UST spreads to bunds widen.

FX: modest USD reaction on softer-than-expected core

The initial reaction in the FX market saw a modest knee-jerk USD sell-off, but the move

has mostly retraced (to net-flat) at the time of this writing. The initial reaction was

mainly due to the below-consensus 0.2% MOM core print, as the rest of the headline

prints came in as the market expected. On the margin this likely takes a bit of heat off

the Fed going into next week’s highly anticipated meeting, though it is still just one data

point in a broader trend of US resilience/outperformance amid upside inflationary risks

overall.

Fed pricing by year end has not materially changed, with one full hike still mostly priced

for YE 2026, which is consistent with the more restrained USD reaction. That said, we

would have anticipated a more asymmetric move higher in the USD on a hotter core

print. Overall relative growth and inflation dynamics in the US vs. ROW still point to