US inflation slows in April

Headline US CPI inflation was at 3.4% y/y in April, in line with expectations and down from 3.5% in March. On a monthly basis, price growth was, at 0.3%, slower than the prediction that it would remain at 0.4%, as it was the previous month. Core inflation, stripping out food and energy, was at 3.6% y/y, down from 3.8% previously, and 0.3% m/m, down from 0.4%. This was the first time in six months that annual headline inflation slowed from the previous month, in a positive signal for the Federal Reserve. Nevertheless, price growth has been stickier than the Fed would have hoped, and while the latest data was encouraging, there was little in it that might dissuade FOMC officials from the higher-for-longer more hawkish line that they have been adopting in recent commentary. Our view remains that the first rate cut will come in September, with a total of two 25bps cuts in the latter part of the year.

In other US data released yesterday, retail sales were flat m/m in April, missing the predicted 0.4% growth and markedly down from the 0.6% expansion in March. Stripping out automotives and petrol, sales were actually down 0.1%, compared with a 0.7% increase in March (downwardly revised from 1.0% on the initial print) and missing the predicted 0.2% growth. With online sales also under pressure, the data suggests that higher prices are now starting to impact the US consumer.

CPI inflation in Saudi Arabia slowed moderately to 1.6% y/y in April, down from 1.7% in March. Prices were 0.3% higher than the previous month. Food and beverages inflation decelerated to 0.8% y/y, the joint slowest pace since October, but housing and utilities continued to accelerate, rising to 10.4% y/y, from 8.8% the previous month, thereby remaining the primary driver of price growth in the kingdom. Elsewhere in the GCC, CPI inflation in Oman rose by 0.4% y/y in April, up from 0.2% a month earlier. Food costs are the main contributor to inflation with prices up almost 3%.

Egypt’s cabinet announced that it has received the final USD 14bn of the USD 35bn investment pledged by the UAE in February as part of a wave of international support which included the enlargement of an existing IMF programme and further money from the World Bank and the EU.

The Eurozone economy grew by 0.3% q/q in Q1 2024, ending the recession that took hold of the economy in the second half of last year. Both Germany and France saw their economies expand by 0.2% q/q while Italy and Spain also recorded growth among the large economies. The improvement in the eurozone was generally expected by markets and while the growth is positive, most economies in the bloc remain at low levels of activity. Along with declining inflation pressures, the soft level of activity should help to prompt the European Central Bank to begin cutting rates as early as next month.

Japan’s GDP contracted 2.0% q/q annualised in Q1, a larger contraction than the predicted 1.2% decline, and the fourth quarter was revised down from the initial 0.4% growth to 0.0%. This means that the Japanese economy has failed to grow for three consecutive quarters. Household spending has been under pressure, falling for four quarters in a row, as inflation has picked up for the first time in decades, albeit still at fairly benign levels in comparison to the rest of the world. This will make the Bank of Japan’s aim to raise interest rates more challenging.

Today’s Economic Data and Events

16:30 US initial jobless claims, week to May 11. Forecast: 220,000

17:15 US industrial production, % m/m, April. Forecast: 0.1%

Fixed Income

• US Treasuries gained yesterday as bets on rate cuts by the Fed were bolstered by the slight cooling in inflation. Yields on the 2yr fell 9bps to 4.7237%, while the 10yr fell 10bps to 4.3400%.
• There were similarly large moves in Europe, where in the UK the 10yr gilt yield fell 11bps yesterday to 4.066% and 10yr bund yields fell 13bps to 2.422%.

FX

• The US dollar fell back to a one-month low against its peers yesterday after US CPI inflation came in a little cooler than anticipated. The DXY index fell 0.6% on the day and is tracking lower again this morning.
• GBP added 0.7% to close at 1.2685, while EUR added 0.6% to 1.0884. JPY gained 1.0% to 154.88, and is tracking further gains against the greenback this morning.
• Commodity currencies also gained, with CAD, AUD, and NXD adding 0.4%, 1.0%, and 1.3% respectively.

Equities

• Equity markets were bolstered by the inflation print yesterday, with strong gains in the major indices. In the US, the Dow Jones, the S&P 500, and the NASDAQ gained 0.9%, 1.2% and 1.4% respectively.
• European markets were similarly green yesterday, albeit with more modest gains. The composite STOXX 600 added 0.6%, with the CAC up 0.2% and the DAX 0.8%. The FTSE 100 added a lesser 0.2% as sterling climbed but the more UK-focused FTSE 250 added 0.8%.

Commodities

• Oil markets were also swept up in the risk-on mood yesterday, with Brent futures adding 0.5% on the day to USD 82.8/b, while WTI gained 0.8% to USD 78.6/b.
• The IEA revised their oil demand growth forecast for 2024 lower by 140k b/d to 1.1m b/d in their latest oil market report. The downward revision was prompted by much lower consumption levels in OECD economies, particularly in Europe according to the IEA. For 2025 the IEA expects demand growth of 1.2m b/d.
• On supply the IEA expects growth of 580k b/d this year thanks to a 1.4m b/d increase in non-OPEC+ supply while the OPEC+ alliance sees output contract.