US Inflation – Not enough progress
Wednesday’s US CPI print is likely to slow from last month but won’t be enough to sway the Fed to cut soon. The consensus survey sees headline CPI falling by 10bp to 3.4%, and core CPI by 20bp to 3.6%. On a month-on-month basis, core CPI is likely to come in around 30bp, below the Q1 average pace of 36bp, but still too high for comfort. Headline inflation will be supported by higher energy prices, while core drivers are likely to stay sticky, especially shelter. Despite big events such as rising energy prices (leading to high global inflation), the Fed will not change course much. On an upside surprise, Powell told us hikes are unlikely, and one single downside surprise won’t be worth much before being confirmed by further prints.

European central banks – Moving ahead
The Swedish Riksbank was the second G10 central bank to lower rates last week, by 25bp to 3.75%. The Swedish economy stands out as particularly weak, amid slowing growth and rising unemployment. Yet, the bank delivered a template for regional peers, whereby the cut was accompanied by a hawkish guidance of gradual cuts. The Bank of England instead delivered a “dovish pause”, signalling a willingness to ease policy ahead but also only at a gradual pace. European central banks have space to diverge from the Fed this summer, like the ECB cutting in June. The cutting path in Europe for the second half of the year remains less clear and could end up gradually like the Fed’s.

EM central banks – Hawkish twist
In emerging markets, central banks are turning slightly more hawkish because of the recent Federal Reserve turn. In Brazil, BCB slowed down the pace of cuts from 50 to 25 bp a meeting and removed dovish forward guidance. In Mexico, Banxico held rates steady and increased end-2024 inflation projections, after having cut in March. In Turkey, the central bank used the inflation report as an opportunity to revise inflation projections higher and deliver a hawkish message. A more hawkish stance will help support currencies if US rates stay volatile, especially in Latin America where real rates are very high. A stabilization of US rates will see a sudden return to a dovish narrative in the region, though. In Turkey, a hawkish attitude and some sign of disinflation are finally helping currency stability and bringing back capital inflows.

Algebris Investments’ Global Credit Team