US CPI inflation shows little sign of tariffs pressure

US CPI inflation ticked up to 2.4% y/y in May, from 2.3% in April. While this was a modest acceleration from the previous month, it was still a little slower than the predicted 2.5%, and confounded expectations from some quarters for a sharper uptick as tariff-related price pressures start to feed through to the data. Core inflation was unchanged at 2.8% y/y, while both were up 0.1% m/m. Goods prices were unchanged on the month which suggests that importers are still absorbing any higher tariff related prices, and that we could still see a sharper rise in inflation in the coming months.

US President Donald Trump declared yesterday that a trade framework with China had now been reached, after several days of negotiations in London. This would extend the truce previously agreed in Geneva, and see tariffs continue at the lower rate – according to Trump’s social media post, this is 55% for China (incorporating the baseline 10%, 20% related to fentanyl, and 25% already in place from his first term), while the US will see tariffs of 10%. The discussions in London centred around access to Chinese rare-earth metals and US technology exports and there appears to have been some progress on this. However, a formal deal has still not been reached and there was other more negative news on the tariff front elsewhere as President Trump announced that he would set unilateral tariffs for other countries, sending them letters in the next several weeks ahead of the July 9 deadline.

Today’s Economic Data and Events

11:00 Turkey industrial production, % y/y, April. Forecast: 2.5%

14:30 India CPI inflation, % y/y, May. Forecast: 3.0%

16:30 US initial jobless claims, week to June 7. Forecast: 242,000

Fixed Income

• US treasuries rallied yesterday as the lower than expected CPI print boosted rate-cut bets. Yields on the 2yr dropped 7bps to 3.9515% while the 10yr was down 5bps to 4.4203%.

Currencies

• Higher rate cut expectations and warnings around more tariffs from Donald Trump both weighed on the USD yesterday with the dollar index closing down 0.5% on the day.
• Most majors gained against the greenback with the exception of the commodity currencies with both AUD (0.3%) and NZD (0.4%) closing lower.
• EUR was a notable gainer as it added 0.5% to 1.1487, while GBP closed 0.4% higher at 1.3547. JPY strengthened 0.2% to 144.56.

Equities

• More sabre rattling around unilateral tariffs prompted a sell-off in US equities yesterday. While the Dow Jones managed to close broadly flat, the S&P 500 and the NASDAQ lost 0.3% and 0.5% respectively.
• Locally the DFM fell 0.1% while the ADX added 0.1%. Saudi Arabia’s Tadawul closed flat.

Commodities

• There was a sharp jump in oil prices yesterday, seemingly prompted by a US decision to reduce its staff levels at some Middle Eastern embassies. Brent futures closed up 4.3% at USD 69.8/b while WTI was up 4.9% at USD 68.2/b. Both benchmarks are down this morning on renewed trade fears but have held on to much of the mid-week surge.
• Bloomberg has reported that ADNOC is considering buying some BP assets should the UK be forced to divest more assets, quoting anonymous sources.