Strong Core CPI + Worrying Details Required To Sway Fed Decision (1/2)

Today's US inflation report for May presents a clear risk to Wednesday's FOMC decision and communications - and mostly in a hawkish direction if (as expected) the Fed came into today planning on delivering a hold.

• Our view is that the bar to a hike has been set very high and it would require a significant beat on CPI to seriously put a raise on the table. (Our CPI preview is here.)
• With consensus on core at 0.4% M/M (with a downside skew in the survey w average at 0.36%), the figure would either have to be 0.5% M/M to begin having that conversation, or in the case of an in-line reading, for the details themselves to be relatively worrisome.
• Note that the last two monthly core readings were in line and saw yields drop sharply.
• It would probably require both a beat and worrying details for serious consideration of a surprise hike Wednesday. Particular attention will be paid to the role paid by rents: if we get a strong core figure, and it's driven mostly by shelter, the FOMC will largely look through it as it is more focused on services ex-housing. In terms of expectations: OER seen at an average 0.50% (range 0.46-0.54%) and primary rents an average 0.53% (range 0.48-0.60%). We'd also put used cars in this category, as they are are seen pulling back in May. If it's ex-cars, ex-shelter driving the beat, that will be considered relatively worrisome for the FOMC.
• Ex-Fed Vice Chair Alan Blinder (who argues for no further Fed hikes) told MNI last week that a "really bad looking" CPI report could still prompt a surprise 25bp hike, with Chair Powell "right in the middle" of the increasingly divisive hawkish and dovish factions.
• Though with the bar to a hike set so high by pre-blackout communications, an unexpectedly hawkish CPI report today could instead translate into a more aggressive dot plot (more members seeing potential for 2+ further hikes this year to above the 5.4% median that is consensus for the June dot plot) in conjunction with an increased core PCE forecast for 2023 (already seen rising from 3.6% in March to 3.7-3.9%). It would probably tilt Powell's press conference more hawkish too.
• It could also cement some hawkish dissents. The prime candidates among voting participants are Kashkari and Logan; Bowman and Waller might object but there hasn't been a Governor dissent in nearly 20 years.