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EBC Flags 4 Asymmetric Risks Lurking Behind June’s CPI Setup

Markets had their moment of celebration. May’s CPI came in cooler than anticipated, and within minutes, traders were pencilling in a September rate cut with growing confidence. Equities jumped, Treasury yields eased, and the US Dollar Index (DXY) slipped to 98.6 — its lowest since April 2022. But beneath the surface calm, EBC Financial Group is raising the red flag. While the headline CPI rose 2.4% year-on-year, slightly lower than expected, and monthly inflation clocked in at just 0.1%, the narrative isn’t as clean as the headline. The team at EBC urges a more critical reading of the landscape — especially with June’s inflation data looming large just ahead of Jackson Hole. Below, EBC outlines four key asymmetric risks that could upend the current market narrative. 1. Core Inflation Refuses to Budge At a glance, May’s print seemed like a win for disinflation. But the real story lies in the core. Core CPI — excluding food and energy — remained at 2.8% year-on-year. Sticky categories like housing, insurance, and services showed no signs of softening. Shelter costs alone rose another 0.3% in May, a crucial component since they make up over one-third of the CPI basket. "Markets saw the 0.1% print and cheered, but the Fed's focus is deeper," said David Barrett, CEO of EBC Financial Group (UK) Ltd. "Sticky services inflation, rising shelter costs, and new tariff risks tell us we're not out of the woods yet. This is not the soft landing — it's just a temporary cloud break." 2. Dollar Weakness Is a Double-Edged Sword The DXY has now shed roughly 3–4% year-to-date. That’s been good news for risk assets and emerging market currencies — with notable gains from Mexico and parts of Asia. However, EBC notes this dollar softness could introduce a fresh inflationary tailwind for the US. "A weaker dollar reduces import costs for other countries — but raises them right here at home," said Barrett. "With tariffs on over $18 billion worth of Chinese goods taking effect in June, we expect potential spillovers into core goods inflation. Markets celebrating now may find themselves repositioning rapidly if CPI re‑accelerates." 3. Tariff Shock Incoming Geopolitical tensions are adding to the inflation equation. New US tariffs, particularly on EVs, semiconductors, and green tech from China, are set to phase in this month. While May CPI data came in softer, EBC sees this as a temporary reprieve, not a lasting trend. The short-term effects of the tariffs may be subdued, but EBC is watching closely for medium-term impacts on core goods prices — especially if a weaker dollar compounds import costs. Investors who are too focused on rate cut odds may be blindsided by this supply-side friction. 4. Labour Market Strength Limits Fed Flexibility With unemployment steady at 4.0% and average hourly earnings up 3.9% year-on-year, there’s little urgency for the Fed to rush into a dovish turn. Despite market optimism, the Federal Reserve has held its stance. In contrast, the European Central Bank already cut rates in June, and the Bank of England is expected to follow suit in July. "The June data will be a credibility test," Barrett added. "If inflation flares while the dollar remains weak and tariffs kick in, the Fed may face conflicting pressures — supporting growth on one hand while holding the inflation line on the other." EBC’s Takeaway: This Is Not the Pivot Yet While rate cut odds are rising, EBC urges caution. Traders are crowded into long equity and rate-sensitive positions, making markets vulnerable to rapid reversals. "This is not a time to chase rate cut narratives," Barrett concluded. "Asymmetric risks are building. Investors should stay nimble, diversify exposure across currencies and sectors, and prepare for renewed volatility. The next data print could be the pivot — or the plot twist." Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

EBC Financial Group

Disclaimer:

Investment involves risk. The content of this report is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.

Publication date:

2025-06-19 07:59:35 (GMT)

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