Fin-X Pulse - CPI below expectations, US policy emphasis changing

Last night's pre-tariff CPI reading was moving in the right direction. The medium-term outcomes are likely to be determined by White House trade negotiations and spending plans. Overall, the government appears to be de-emphasising the negative growth policies, leaving a more stimulative outlook for next year. The Federal Reserve can afford to be patient.

• US CPI rose from a monthly reading of -0.1% in March to +0.2% in April, below consensus forecasts of a +0.3% increase.

• The annual change sFCpied from +2.4% to +2.3%, also -0.1% below expectations.

• Core CPI ex-food & energy increased by less than expected from +0.1% in March to +0.2% last month, with the annual increase remaining at +2.8%, in line with expectations.

• The index for shelter rose +0.3% in April, accounting for more than half of the headline monthly increase. Shelter prices have risen by +4.0% over the past 12 months.

• The energy index also increased over the month, rising +0.7% as increases in the natural gas index and the electricity index more than offset a decline in the gasoline index.

• The index for food, in contrast, fell by -0.1% in April as the food at home index decreased -0.4% and the food away from home index rose +0.4% over the month. 

• The Fed’s “supercore” measure of core services ex-housing also cemented last month’s steep slowing, coming in at an annual increase of +2.7%, down from +4.0% at the start of the year.

• S&P500 5,887 +0.7%, Nasdaq Comp. 19,010 +1.6%, S&P/ASX200 future 8,310 +0.2%,

• US 2yr 4.00%  -1bp, US 10yr 4.46% (unch)

• US dollar (DXY) index 101.0 -0.8%, AUDUSD 0.6471 +1.6%, Gold US$/oz 3,250 +0.4%

  
  

  

  
  
  
  

  Fin-X Wealth View

  • The CPI dataset shows that underlying inflation was moving closer to the Fed’s policy objectives before the impact of recent changes to government policy.

  • The April data includes little impact from tariffs. The 2nd April tariffs will likely start influencing the May reading in a month’s time. This will likely push consumer prices higher in the short term but it's very difficult to gauge the medium-term effects after the announcement that American tariffs on Chinese imports will be lowered by -115% to 30% for 90 days. 

  • The reduction in Chinese tariffs reduces the growth risks and implies that any empty shelves in stores are likely to be temporary.  However, the eventual tariff rate is likely to settle at a level significantly higher than at the end of 2024.

  • White House officials have repeatedly suggested that 10% will be the global baseline, perhaps with a few exceptions as in the case of the UK deal, while Chinese tariffs are likely to be higher. 30% seems to be the most reasonable estimate for the time being.

  • As a consequence, the US economy is still likely to experience a price shock. But the magnitude and duration is likely to be lower than previously feared. It's also difficult to know how much the recent uncertainty will have slowed growth and prompted permanent job cuts.

  • The Federal Reserve has already said that it intends to be patient while it assesses the growth and inflation risks. The US-China pause removes some of the growth risks and gives the Federal Reserve even more time to review the data before acting. 

  • Market pricing has moved to reflect just -0.5% of easing in the Federal Funds rate by year-end to 3.75%-4.00%, with the first full quarter-point cut not expected until September. 

  • Assuming that a trade deal with China is agreed along the current lines, the outlook will have changed dramatically since the beginning of the year. The US$ -1 trillion to US$ -2 trillion in planned government spending cuts are now a distant memory. Although there will be some impact of the higher tariffs, the current thrust of policy is now switching emphasis to pro-growth deregulation and tax cuts, providing significant stimulus into 2026. 

  • It's difficult to know what the net effects will be this year. However, the significant increase in government borrowing, lower liquidity and higher rates will likely be supportive of the US dollar after an initial rally in risk-sensitive currencies, including the Australian dollar.

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