
US/China: US headline CPI hit a three-year high, while core inflation stayed benign. The set of labour market data effectively ended all hope of Fed cuts, with the market pricing in a full cut by end-2026. Nonfarm payroll came in at 172k, beating consensus (88k) by a large margin. Moreover, there was 93k in net payroll revisions over the preceding two months. Amid steady unemployment, labour force participation, and still-elevated wage growth, the key takeaway is that the jobs market is doing well. That said, US headline CPI came in line with expectations at 4.2% y/y in May – the highest in three years - with the energy component driving the bulk of gains. The other components saw muted price increases, allowing core CPI to come in at 2.9% y/y. With no signs yet that price pressures are spreading, worries about imminent Fed hikes should ease. Against a backdrop of high inflation (due to energy prices) and no clear timeline for respite (with no Middle East deal announced yet), macro indicators are pointing towards an overheating US economy. This is unlikely to change even as new Fed Chair Kevin Warsh takes the helm at the upcoming FOMC meeting.
The 17 Jun meeting marks the official debut of newly confirmed Fed Chair Warsh, who faces the daunting task of establishing personal institutional integrity. Warsh will first need to balance President Donald Trump’s desire for rate cuts with the FOMC members’ increased data-dependent inclination towards a longer, more hawkish pause. He is likely to align with US Treasury Secretary Scott Bessent’s view that the wartime inflation surge was a transient blip that would naturally evaporate when the Middle East conflict ends, and the Strait of Hormuz reopens.
Meanwhile, China’s exports have jumped by 19.4% y/y in May. Beyond low base comparisons, resilient regional trade momentum and robust demand for AI products are serving as key catalysts. Outward shipments of hi-tech products have surged by 35.4%. External auto sales are soaring, as demand for Chinese EVs continues to boom alongside higher oil prices. An improving trade relationship with the US is providing an additional tailwind. Following the positive outcome of the recent Trump-Xi meeting, shipments to the US have climbed by 35.6%.
On the inflation front, PPI has grown by 3.9% y/y in May, reaching its highest level since Jul 2022. Among the key components, petroleum and natural gas prices, along with related processing costs, have surged by 35.7% and 18.4% respectively. However, downstream manufacturers and retailers are likely facing margin pressure from these rising input costs. CPI continues to lag well behind PPI amid still-tepid domestic demand. Headline consumer prices are holding at 1.2%, while core CPI has edged down to 1.1% from 1.2% in April. This indicates weak pricing power at the retail level and subdued domestic demand.

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