US inflation data in focus

Market participants are now waiting for the April US CPI figure, which is expected to be released later today. Investors need to keep their eyes open for any signs that inflation might be beginning to cool at an annual rate of 8.1%. The producer price index will be released the following day.

The major US stock market indexes rose slightly on Tuesday, allowing a small break from the equity slump of 2022. There are several reasons for the stock markets' decline, including fears of an economic recession due to high inflation. After investors digested the latest Federal Reserve remarks, the yields on US Treasury bonds were little changed, and the dollar index remained at its highest level since 2020.

Inflation data

The Chinese government released CPI and PPI numbers for April earlier on Wednesday. German and US consumer price indexes are also among the important data for today.

China's April inflation figures showed a drop in the personal price index from 8.3% to 7.8%, while the consumer price index rose by 1.8%, reaching its highest level so far this year but still well below the previous year.

Also, Germany's Consumer Price Index (CPI) rose 7.4% on a year-over-year basis in April.

In light of the ISM price paid data in both services and manufacturing climbing higher in April, there is no sign of a peak in headline inflation yet. Today's headline CPI numbers could give some indication of whether inflationary pressures have slowed or if inflation expectations continue to rise.

Inflation and market expectations

Following the recent announcement from the Federal Reserve that it would be raising its benchmark interest rate by 50 basis points, the most significant hike in 22 years, investors are trying to predict how aggressive the central bank will be for the rest of the year. The dollar's value has increased nearly 9% since 2022, largely thanks to a hawkish Fed focused on curbing inflation.

The CME's FedWatch Tool indicates that the markets are expecting a hike of at least 50 basis points during the Federal Reserve's June 2022 meeting. Suppose the markets receive a positive surprise to the inflation figures. In that case, it will encourage them to price in a 75bp hike later in the year, Which can significantly support the dollar. In contrast, a negative surprise will retain the pricing for 50bp increases in June and July, holding the dollar steady.