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Eyes on US consumer inflation

For all the noise and punditry about Tuesday night’s 2024-25 federal budget, investors will be looking later in the week to see what happened with US consumer inflation in April.

US inflation levels and interest rate levels are by far the biggest influence on global markets at the moment, even if inflation is falling faster in the US and Europe.

All the talk about spending, the 2025 Australian federal election impact from the budget, estimates of deficits, perhaps a hint of a surplus somewhere, and all the argy-bargy from politicians will be overtaken by the data in the US Producer Price Index and then the big one, the Consumer Price Index (CPI) the next day (Wednesday night, Australian time).

With Sweden joining the Swiss National Bank in cutting rates and the Bank of England moving to be joint leaders with the European Central Bank to cut in the northern summer, a sharp fall in inflation might see the US Federal Reserve’s starting position advance as well.

But hopes for a big fall seem forlorn given market forecasts are for a small change in March’s core inflation to 3.7% from 3.8% and a 3.4% reading for headline inflation, down from 3.5% in March. Some forecasts have a dip in month-on-month readings for core inflation to 0.3% from 0.4%.

Wednesday also sees the release of retail sales figures for April with a forecast of 0.4% growth, down from 0.7% in March.

Producer prices are forecast to be up 0.2% for both the headline and core readings and an annual rate of 2.4%.

Analysts will line up the retail sales data with the sharp fall in consumer sentiment this month – the biggest fall in six months which seems a little odd given the stronger than forecast retail sales figures in March.

This week’s quarterly reports from Walmart and Home Depot will add to the importance of the retail sales data.

Any outcome better or worse than the consensus forecasts will see big changes in momentum which will spill over here and overwhelm any impact from the budget.

This hasn’t stopped the market from being less pessimistic about the Fed’s maneuvering room than it was in April. A series of poor indicators recently published in the United States has revived expectations for a rate cut in September – sooner than previously thought.

This situation has pushed the dollar down to 1.078 against the euro. The yield on 10-year US debt fell to 4.45% on Friday, while the 2-year bond yield moved further away from the 5% mark.

But Fed chair Jay Powell has a public appearance scheduled for the day before the CPI release, but after the PPI is released.