Financial markets remain largely inactive as trading volumes dip to their lowest levels since early January. On Monday, futures tied to the key S&P 500 index recorded the quietest session since January 9, with similar inactivity observed in 30-year Treasury bond futures. Investors now await the release of crucial US inflation data, seeking a trigger to break the current market stalemate.
The upcoming May Consumer Price Index (CPI) report is forecast to show headline inflation rising to 2.5% year-over-year, up from 2.3% in April. More importantly, the core CPI—excluding the volatile food and energy sectors and closely monitored by Federal Reserve officials—is expected to increase to 2.9%, marking its highest level in three months.
US Inflation Data Signals Rising Prices
Traders welcomed April’s CPI figures as relatively stable, easing fears of a sudden inflation surge amid the Trump administration’s escalating tariffs. However, later producer price index (PPI) data revealed that businesses had largely absorbed rising input costs, shielding consumers from price hikes.
More recent Purchasing Managers Index (PMI) surveys from S&P Global and the Institute for Supply Management (ISM) suggest price pressures are building upstream. Notably, the ISM reported the fastest increase in service sector prices since November 2022.
Historically, this indicator tends to lag headline inflation measures like CPI and the Fed’s preferred personal consumption expenditure (PCE) index by about two months, pointing to further inflationary pressures ahead.
Fed Rate Cut Bets Face Headwinds from Inflation Data
Whether this inflation uptick appears in the imminent CPI figures or shortly thereafter, it strengthens expectations that the Federal Reserve will hold off on accelerating interest rate cuts. Currently, markets price in at least one 25-basis-point cut by October, with a 56% chance of a second cut before year-end.
Despite this, market sentiment largely views slowing economic growth—not inflation—as the greater concern for policymakers. Inflation expectations embedded in bond market “breakeven rates” have steadily declined since the start of the year, signaling that recession fears are overshadowing reflation risks.
If the CPI data reinforce the Fed’s cautious stance, risk appetite could suffer. Equity markets may come under pressure, while gold prices and long-dated Treasury bonds could gain as investors seek safe havens. Concurrently, the US dollar might weaken as traders adjust to the likelihood of delayed rate cuts, potentially leading to sharper easing measures down the line.
