US inflation accelerated in May to the fastest pace in more than six years, reinforcing the Federal Reserve’s outlook for gradual interest rate hikes. The Consumer Price Index rose 0.2% from the previous month and 2.8% from a year earlier. The annual gain was the biggest since February 2012 and follows a 2.5% increase in April. Excluding food and energy, the core gauge was up 0.2% from the prior month and 2.2% from May 2017. The pickup in headline inflation partly reflects gains in fuel prices, though the annual gain in the core measure was the most since February 2017. While the Fed is widely projected to raise borrowing costs this week for the sixth time in 18 months, the path of inflation will figure into policy makers’ thinking on the pace of increases in 2019. The Federal Reserve is expected not to steepen the path of interest rate increases this year in the face of accelerating US growth, according to the bulk of economists. Median estimates point towards two more increases this year, which matches the Fed’s own projections back in March.
Donald Trump’s attacks on Canadian Prime Minister Justin Trudeau are raising concerns that he might follow through on threats to impose auto tariffs, a move that would devastate the car industry in Canada and lead to higher US prices. The Trump Administration’s pledge to consider tariffs on all imported vehicles took on more urgency last weekend after Trump and his advisers accused Trudeau of “bad faith diplomacy” for his trade comments following a meeting of G7 leaders in Quebec. Canada retaliated when the US imposed duties on imported steel and aluminum last month and would likely do the same on auto tariffs. The US exports more vehicles to Canada than anywhere else in the world.
The International Energy Agency said that OPEC members Iran and Venezuela could lose almost 30% of their oil output next year due to US sanctions and economic upheaval, in its first detailed forecast for 2019. The report this morning will increase pressure on a meeting of OPEC and its allies next week to permit increases in output. West Texas Intermediate was trading at $66.26 at the time of writing.
The European Central Bank will be in the spotlight Thursday as it considers whether to outline detailed plans for winding down its bond buying program, the centerpiece of its quantitative easing strategy. The ECB’s key lending rate stands at 0%, while the rate on money deposited overnight at the central bank stands at negative 0.4%. The combination of bond buys and extraordinarily low policy rates has helped drive the yields of European government bonds into negative territory. The ECB is fully expected that it will leave interest rates at current levels well beyond the end of its bond buying program, but investors will be looking for clues as to when the first rate rise may come.
China has emerged as the main benefactor from President Trump’s summit with North Korean leader Kim Jong Un. In talks with Kim on Tuesday in Singapore, Trump had committed to an open ended negotiating process stating the US would suspend military exercises with South Korea. Given that North Korea has halted missile and nuclear tests, this has amounted to the very dialogue of “suspension for suspension” model that China has advocated for years.