FXStreet (Barcelona) – Strategists at BofA-Merrill Lynch, preview the US core PCE inflation data for May and forecast a 0.1% gain, which might underpin a cautious Fed stance and lead front-end yields and the dollar lower.
Key Quotes
“Core PCE inflation is likely to rise 0.1% in May for the fourth straight month, similar to the 0.1% increase in core CPI. However, these two core measures have been diverging of late, with core PCE declining even as core CPI has been rising. We expect annual core PCE inflation to hold steady at 1.2% yoy in May, well below the Fed’s 2% target.”
“Global factors appear to be adding more immediate disinflationary pressure, offsetting eventual upward pressure from a gradually tightening labor market. We see a risk that core PCE inflation could inch lower into the Fed’s September meeting given the likely pass through from weakening import prices, but Chair Janet Yellen argued at the June FOMC meeting that the Fed may be able to look past that transitory impact.”
“Since mid last year, core PCE has been subdued with the most recent print for April (yoy % change) hitting its lowest level. Although the Fed has attributed the soft inflation partly to transitory factors such as low energy prices, they re-emphasized in the June FOMC meeting that they want to get “reasonably confident” about the inflation outlook before raising rates.”
“Our economists expect core PCE yoy% change to remain low at April level (1.2%). Another soft print for May, especially post the slowdown in the dollar rally and oil sell-off, should make the Fed less optimistic about the inflation outlook in our view. This could trigger further capitulation by front end shorts given that asset managers remain record short Eurodollars. Long end rates should remain hostage to global factors, in particular developments around Greece.”
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