2 min readRate cuts decision still on scrutiny
April’s US inflation data came in softer than expected, reinforcing the possibility of Federal Reserve interest rate cuts later in 2025. Disinflationary pressures are becoming more evident, particularly in airline fares (down 2.8% MoM and 7.9% YoY), used car prices (-0.5% MoM), apparel (-0.2%), and food prices (-0.1%). Notably, egg prices, lagging official CPI by one month, fell by 12.7%, dragging the overall food price index lower.
While some categories like medical care services (+0.5% MoM), medical commodities (+0.4%), vehicle maintenance (+0.7%), and insurance (+0.6%) showed price strength, they were more than offset by broader downward trends. Importantly, shelter costs, which account for over a third of the CPI basket, remained elevated at +0.3% MoM and +4.0% YoY. Leading indicators such as the Cleveland Fed’s new tenant rent index suggest these pressures will ease significantly by late 2025 or early 2026, outweighing the inflationary forces caused by tariffs.
Services prices, which dominate the US inflation basket, are also showing signs of softening. Commodities excluding food and energy, which are most exposed to tariffs, constitute only 19.4% of the inflation basket. Therefore, the recent easing of US-China trade tensions, which impact commodities mainly, reduces the potential inflationary threat from tariffs.
This trend is echoed by the NFIB (National Federation of Independent Business) small business survey, which reported a decline in the number of firms raising prices (25% in April vs. 31% in February) and those planning to do so in the next three months (28%, down from 30%).
Long-term bond yields on the rise
Coinciding with the inflation release, the DXY weakened slightly, commodities failed to rally, highlighting fragility in risk asset rallies, and long-term bond yields neared 5% again.
Markets are currently pricing in just two rate cuts for 2025. However, expectations could shift if disinflation continues and economic growth weakens further, outweighing residual tariff effects. April retail sales data was broadly in line with expectations, despite persistently weak consumer sentiment. However, core retail sales, excluding autos and gas, missed estimates. Additionally, producer price inflation came in significantly below expectations, with the services component turning notably negative.
Together, these data points challenge the market’s current assumption of just two cuts and suggest the Federal Reserve may adopt an increasingly dovish stance in the months ahead.
At the beginning of the week investors participated with little inflows, this has since recovered following the macro data suggesting disinflation, with inflows now sitting at US$520m for the week.
