CPI Eyed As Trade Talks Conclude

WHERE WE STAND – Market participants have, over the last couple of days, ended up getting quite a good idea of what watching paint dry must feel like, with yesterday being a second straight day of waiting, waiting, and waiting some more for news out of US-China trade talks, held here in London.

Interestingly, while Treasury Secretary Bessent was involved with those trade talks, reports begun to circulate that he may be under consideration by President Trump to take over as Fed Chair next May. I still maintain that the ‘when’ is more important than the ‘who’ here, particularly if Trump does go down the route of selecting a ‘shadow’ Fed Chair some time in the autumn, but all of that is a story for another time.

Anyway, while waiting for trade news, I did learn that Lancaster House plays host not only to numerous international summits, but also to the Government Wine Cellar. Let’s hope someone counted all 32,000 bottles before the talks begun, and more importantly that there are still 32,000 bottles left now that the talks are over!

As for the talks themselves, they wrapped up around midnight, long after I’d retired for the day. I’m rather glad that I didn’t wait up until their conclusion, given how woolly the readout from 2 days of discussions proved to be. The two sides, apparently, have reached a consensus on the agreement made in Geneva last month, with a ‘framework for implementation’ having been negotiated, which will then be implemented if both President Trump, and President Xi, agree. If you’re looking for details then, sadly, they are incredibly thin on the ground.

Markets, unsurprisingly, despite two days of waiting, have shrugged that off with relative ease – stocks ending Tuesday nicely higher on Wall Street, while G10 FX, Treasuries, gold and crude all went on rather random, and directionless, meanders.

Still, my base case of peak chaos being behind us remains intact, with the direction of travel on the issue of trade clearly remaining towards calmer heads, cooler rhetoric, and deals being struck. Hence, my overall market biases remain unchanged, with the path of least resistance still leading to the upside for equities, and new record highs now on the cards for spoos; dip buyers likely holding fire in the Treasury complex until this week’s supply has been absorbed; and, the FX complex to continue trading in tight ranges, as mean reversion remains the main play.  

Besides those trade talks, and the never-ending wait for news, yesterday’s other main point of interest came in the form of the latest UK labour market figures.

The data pointed to a much weaker than expected employment backdrop, with unemployment having risen to 4.6% in the three months to April, a fresh high since the middle of 2021, while earnings growth cooled to 5.3% YoY – still too hot to be compatible with the BoE’s 2% inflation aim, but nonetheless moving in the right direction. Meanwhile, the more timely HMRC payrolls indicator pointed to employment having fallen by a huge 109k in May, the biggest monthly drop since the pandemic, with payrolls now down 276k since the Budget last October. Who would’ve guessed that raising the cost of employment leads to job losses! Clearly, not our esteemed Chancellor.

The illogical nature of fiscal policy aside, the data put the Bank of England even further behind the curve, with policymakers’ boneheaded desire to stick with a ‘gradual and careful’ approach to easing now resulting in a ‘sudden and chaotic’ economic slowdown. The ‘Old Lady’ will stand pat on policy next week, though I can envisage a greater degree of dovish dissent now, and the data strengthens my argument that faster cuts, possibly in bigger clips, will be coming once summer is out. Frankly, there’s no need to worry about potentially persistent price pressures when the labour market is loosening at such a rate of knots. The GBP OIS curve now discounts 50bp of cuts this year, though this still feels too hawkish.

All this reminds me of a couple of old market adages. Firstly, one should never, ever, under-estimate the Bank of England’s ability to make an absolute pig’s ear of whatever situation they are faced with. Secondly, one should never forget that the stock market is not reflective of the underlying economy – despite that grim jobs data, the FTSE 100 touched an intraday record.

Hey, at least I can end with some good news!

LOOK AHEAD – Inflation will be the main thing on participants’ minds today, with the May US CPI figures due later on.

This data is likely to be the first CPI report to show the initial impact of tariffs being passed onto consumers in the form of higher prices, meaning that particular attention should be paid to the goods components of the release (given that services are exempt from the levies). In any case, headline CPI is seen rising to 2.5% YoY, from 2.3% YoY in April, with core CPI set to tick higher to 2.9% YoY, from 2.8% YoY last time out. Interestingly, CPI fixings are priced a bit less aggressively, seeing headline at 2.4% YoY, and just 0.13% MoM vs. the 0.20% MoM consensus.

This is likely to be the beginning of a ‘hump’ in inflation that lasts until the end of Q3, as tariff-induced price pressures slowly but surely make their way through the value chain. The figures, however, are highly unlikely to be a game-changer for the FOMC, who will stand pat on policy next Wednesday, with any cuts before the fourth quarter highly unlikely.

Besides CPI, there are a few other interesting nuggets. This morning brings an update on the latest eurozone wage trends from the ECB, while UK Chancellor Reeves is set to announce the conclusions of the Government’s ‘Spending Review’ after PMQs at lunchtime. Later on, focus falls on US supply, with a 10-year sale due, standing as a key test of the market’s desire to absorb long-end supply amid ongoing deficit worries, ahead of the even more important 30-year auction tomorrow.