With more positive news on the labor market last Friday, both Fed officials and market participants will focus on the other side of the dual mandate, inflation. Accelerating job gains and steady unemployment suggest the current policy stance is not restraining the economy. Timely measures of job losses show few signs of stress, while backward looking benchmark data suggest we are unlikely to see a substantial negative revision to NFP later this summer. The unemployment rate has remained stable, and wage growth is decelerating faster than we had expected. Sideways income growth suggests consumer spending should begin to cool later in the summer. But rising confidence in the labor market outlook does not extend to the inflation side of the mandate where pressures are mounting. In US macro data this week we have the all important May CPI, initial jobless claims, May PPI, trade balance etc. We see May core CPI inflation as likely moderating to 0.2% MoM from 0.376% in April as a temporary boost from technical adjustments to rent-related components diminished. Our forecast for headline CPI inflation is 0.454% m-o-m or 4.198% y-o-y. In UST dated supply, we have $58 BN of 3yr UST supply on Tuesday, $39 BN of 10yr UST supply on Wednesday & $22 BN of 30 year UST supply on Thursday. On the Iran conflict, there is no end in sight for the current middle east conflict. With no deal being announced, global crude inventories are nearing very low operational levels. If the Strait of Hormuz does not open by end June, we expect Brent to average 120 in Q3CY26 and 150 in Q4CY26. So to summarise on US economy, we think new inflationary pressures from emerging sources along with anticipated acceleration in May core PCE inflation will keep policymakers vigilant on inflation risks. We maintain our Fed call of no changes in the policy rate through the end of 2027, but the balance of risks seems to be shifting toward the hawkish side. We do not have any strong views on the US yield curve now. But we remain +ve on DXY. Last week close was above 100 which is a +ve sign for DXY. We now expect 100.60 and subsequently 102 as next target levels for DXY. In RoW events, we have ECB meeting on 11th June where we see a neutral 25 bps hike followed by another 25 bps hike in Sep. In Eurozone economic data this week, we have German factory orders & German industrial production.
