We expect the headline CPI MoM for May to come at .14% & the core CPI MoM for May to come at .24%. This implies a YoY CPI reading of 2.4% for May and a YoY core CPI reading of 2.7% for May. We expect core CPI inflation accelerated only slightly in May. Tariffs appear to have impacted certain product prices, but retailers remained reluctant to pass on higher costs. Pre-tariff inventory accumulation might have helped mitigate tariff shocks. We believe the impact of higher tariffs will likely materialize in the summer as tariffs remain persistent. Core goods price inflation likely rebounded in May, but the impact of tariffs remained limited. CPI’s super core inflation, core services excluding rent-related components, likely moderated to 0.15% m-o-m in May from 0.209% in April. Based on our forecasts for CPI and PPI, we think core PCE inflation likely accelerated to 0.37% m-o-m in May from 0.12% in April, led by PPI-derived components such as portfolio management and investment advice prices and domestic airline fares. Since a large part of the swing in core PCE inflation is likely due to volatile portfolio management and investment advice prices, we do not think the Fed would react to an acceleration in core inflation in May. Policymakers are likely to maintain their wait-and see strategy to assess the impact of tariffs on inflation. Currently markets are pricing in 44 bps of rate cut in REMCY25 (picture above) which is a reasonable pricing in our view. We maintain our view that we will see total 50 bps cut in REMCY25. NFP nos of May were reasonably strong but downward revisions of 95k to previous 2-month readings were significant. Also this week's incoming Q4 estimates from the Quarterly Survey of Employment and Wages (QCEW), which measure NSA job gains independently using mandatory reports from state unemployment insurance programs, imply risks that upcoming benchmark revisions could significantly mark down the currently published pace of nonfarm payroll employment gains from Q2 24-Q1 25. Hence, we continue to expect to a weakening NFP profile from Aug itself in line with rising IJCs recently. By Sep, we will see a UR above 4.5% and consistent NFPs around 75k forcing Fed to focus more on it’s employment mandate than the price mandate. Recent tariff negotiations look reasonably going in direction of a resultant trade weighted average tariff rate of 14% which implies Fed can very well take it as a one-off impact if need arises to focus on it’s employment mandate. In US rates trade ideas, we like steepeners in 2-10 US SOFR as well as paid 10yr USTs.
