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US inflation surprises to the upside

Daniel Richards - MENA Economist
Published Date: 13 June 2022


  • Data out of the US on Friday weighed heavily on markets at the close of the week as concerns around the growth outlook and the possibility of more aggressive action by the Fed returned to the fore. The CPI inflation print for May accelerated once again, as it rose to 8.6% y/y, exceeding expectations that it would match the previous month’s 8.3%. Prices were 1.0% higher than in April, compared with consensus projections of 0.7% and April’s 0.3%. Core inflation was 0.6% m/m, unchanged from April, while annualised it slowed modestly to 5.0%. Energy was up 3.9% m/m (34.6% y/y), with gasoline up 4.1% m/m.
  • Looking at the makeup of headline inflation, while the contribution from goods has diminished (1.7pp), services are increasingly important (3.0pp), with energy (2.4pp) also salient. The FOMC is due to meet this week, and the higher-than-expected inflation figure could see the Fed become more aggressive in its monetary tightening, especially given the breadth of the inflationary pressures at play. There is increasing chatter around the possibility of a 75bps hike, or else the Fed could extend the run of 50bps as it looks to bring inflation under control.
  • The inflationary squeeze on household incomes is weighing heavily on consumer sentiment in the US, and the University of Michigan consumer sentiment index has fallen to a record low of 50.2, down from 58.4 last month and a record low for the series which goes back to 1952. Inflation was cited by 46% of respondents as the reason for their diminished confidence.

Key economic data and events today

10:00 UK industrial production, m/m, April. Forecast: 0.2%

11:00 Turkey current account balance, April. Forecast: - USD 3.2bn

11:00 Turkey industrial production, m/m, April

16:00 India CPI inflation, % y/y, May. Forecast: 7.1%

Fixed Income

  • The acceleration in the May CPI print helped to sink US Treasuries last week and opens up the potential for the Federal Reserve to keep hiking rates by 50bps beyond the June and July FOMC meetings or even use larger hikes of 75bps. Yields jumped across the curve with the front end taking the lead in anticipation of the Fed hiking this week. Yields on the 2yr UST added 41bps over last week with more than 25bps coming in response to the CPI print alone. The 2yr UST yield closed the week at 3.0632%. On the 10yr, yields jumped by more than 22bps last week, including an 11bps jump on Friday, to close out at 3.1555%.
  • Options markets are now pricing in more than 9 hikes by the end of the year, taking the Fed funds rate up to the 3.25%, a hawkish turn from what had been some apparent complacency in the final weeks of May and early June. The Fed will provide new economic projections at this week’s FOMC with some upgrades to the inflation outlook likely.
  • European bond markets were also hammered last week as the ECB committed to a path of hiking rates from the July meeting onward. The 2yr Schatz yield rose by 32bps over the week to 0.962% while the 10yr bund yield climbed by 24bps to 1.514%. Spreads for peripheral Eurobond debt widened last week with 10yr Italian yields more than 224bps higher than German peers, compared with around 200bps at the start of June. Gilt markets also sank with 2yr yields up 36bps to break above the 2% handle and the 10yr rising by 29bps to 2.445%.
  • Emerging markets ended the week on a downbeat note as the elevated US inflation print crushed risk appetite and pulled UST yields higher. South African 10yr yields added 22bps at the end of the week to 10.638% while Indian 10yr yields added 2bps to 7.519%.
  • The Fed takes centre stage with the FOMC on June 15 but the Bank of England also sets policy this week with another 25bps expected.


  • The death of the dollar rally proved short lived as the greenback has gained for two weeks and is now nearly back to levels it had before EURUSD and GBPUSD began to gain. High inflation dampening risk appetite, if any is left, and the pull from higher UST yields will help to keep a bid under the dollar particularly if the Fed considers making use of hikes larger than 50bps. The broad DXY index added almost 2% last week thanks to a 1.9% drop in EURUSD to 1.0519 while USDJPY is seemingly spiraling upward with no apparent restraint. USDJPY added 2.7% last week to settle at 134.14.
  • The Bank of England may be a paltry understudy to the Fed when it meets later this week, particularly as the market seems to show little conviction that the BoE will do the work to try and contain inflation. GBPUSD fell almost 1.38% to 1.2315 and may be driven more by anticipation of Fed policy than BoE this week.
  • Commodity currencies fell sharply with USDCAD up by 1.4% to the benefit of the greenback at 1.2776. Both AUDUSD and NZDUSD fell more than 2% to 0.7058 and 0.6372 respectively. A flight away from risk assets could prompt more selling in the commodity space against the dollar even as oil prices remain firm.


  • Asian markets closed up for the most part last week as restrictions on movement were eased, with Chinese markets shrugging off the risk of new extended lockdowns in Shanghai. President Xi Jinping on Friday pledged commitment to the zero-Covid strategy but at the same time seeking to support the economy. The Shanghai Composite gained 1.4% on Friday to close up 1.9% over the week. Elsewhere in Asia, the Nikkei added 0.3% w/w and the Hang Seng added 3.5%.
  • The story was less positive in Europe, where pressures from inflation and supply chain issues alongside pledges for sharper monetary tightening were already weighing on the outlook even before the US CPI print. With heavy losses at the close of the week, the FTSE 100, the DAX and the CAC lost -2.9%, -4.8% and -4.6% w/w respectively.
  • US markets were similarly under pressure, especially after the upside surprise to inflation on Friday and the weak consumer confidence reading, and there was some sharp selling across the board on the final day of the week. The NASDAQ lost -5.6% w/w after dropping 3.5% on Friday, while the Dow Jones (-4.6%) and the S&P 500 (-5.1%) also ended the week significantly lower.


  • Oil prices were relatively contained in their upward move with Brent adding 1.9% to USD 122.01/b and WTI rising by 1.5% to USD 120.67/b. The threat of more Covid restrictions being imposed in China is serving as a handbrake on an otherwise relentless upward pull in oil prices. Retail fuel prices in the US continue to hit strained levels but so far do not appear causing any demand destruction.
  • Gold prices added more than 1% last week to close at USD 1,872/troy oz, with most of the gains coming in the wake of the May CPI print. Elsewhere in metals markets the movements were more mixed. The rest of the precious metals complex fell while copper and aluminium both closed lower as the prospect of high inflation and high rates weaken the growth outlook for the rest of this year and into next.

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