Inflation data prompted a surge in US bond yields. Stock markets experienced a decline, while the USD/EUR pair rose. WTI oil maintained stability, gold reached unprecedented highs, and silver surpassed gold in performance.

US bond yields, especially at the short end of the curve, surged due to inflation data, with the 10-year bond yield surpassing 4.50%. Stock markets had another challenging week, witnessing declines of over 1%, with the S&P500 marking its largest weekly drop since October. The USD/EUR pair rose to its highest level since November 2023, reaching 0.938. WTI oil maintained its position around $85 per barrel throughout the week. Gold reached historic highs, surpassing $2,400, while silver outperformed gold for the second consecutive week.

Inflation rebounded, leading to a decline in consumer sentiment amid expectations of higher inflation. We expect cuts at the end of the year.

core inflation, particularly in essential services, has risen. Consumer sentiment has declined due to concerns about inflation, with short and long-term expectations at 3.1% and 3.0% respectively. Our model initially predicted 3.14% inflation for 2024, which now aligns with consumer expectations, potentially resulting in stagnant sentiment for the year. We anticipate no rate cuts until the end of the year.

Inflation has rebounded beyond initial expectations, leading to the disappearance of any likelihood of rate cuts in both June and July.

The latest inflation figures, encompassing both headline, mainly driven by energy and shelter costs, and core CPI, have surpassed expectations by 0.1%, with each registering at 0.4%. Notably, the core CPI has sustained a streak of three consecutive months at this level, marking the longest such period since early last year. YoY comparisons reveal a headline CPI increase of 3.5%, while the core CPI remains steady at 3.8%. This uptick casts doubt on the likelihood of a rate cut by the Federal Reserve in June. Initial market projections had priced in a 15 bp reduction, but this has since been revised down to just 5.5 bp. The current inflation trajectory, almost doubling the necessary rate to achieve the 2% YoY target, suggests any monetary policy adjustment is probable, according to the market, to be postponed until at least September.

The surge in super core inflation primarily stems from essential services, excluding energy and housing, which recorded a MoM increase of 0.65%. Particularly notable were rises in healthcare and transportation services, notably vehicle maintenance and insurance. Furthermore, housing costs, particularly rents, contributed to the overall inflationary pressure.

Considering the current economic conditions, a rate reduction in June seems unlikely. The prospects for July also appear uncertain, leaving September as the most plausible window for any Federal Reserve policy easing. Our current outlook suggests a single cut, likely to materialize in December. This timing is chosen partly because September, being close to the elections, might influence the decision, potentially seen as a benefit for the incumbent party.

Consumer sentiment declined as inflation rebounded, with expectations for inflation increasing in both the short and long term, surpassing 3%.

In April, the University of Michigan's Consumer Sentiment index unexpectedly declined to 77.9, largely influenced by concerns surrounding inflation. Both short-term and long-term US inflation expectations reached their peak for the year, standing at 3.1% and 3.0%, reflecting a sense of frustration among consumers and the Fed, which cannot cut rates. However, perceptions regarding personal finances, business conditions, and labour markets have shown consistency in recent months, suggesting a nuanced outlook possibly shaped by the forthcoming presidential election.

Our model indicates a 3.14% inflation rate for 2024. With inflationary pressures likely to persist, consumer sentiment may remain flat throughout the year. The continued high inflation rates suggest that interest rates will remain elevated for an extended period, and as a result, we do not anticipate any rate cuts in the near future.