US consumer prices excluding food and energy rose 0.2% month on month in May, undershooting the 0.3% forecast. The print points to softer underlying inflation pressure than markets had pencilled in for the period.
The core CPI (m/m) reading follows recent months of moderate gains and will be read alongside broader CPI measures when assessing the near-term inflation trend. With the outcome below consensus, attention is likely to shift to whether this pace persists in subsequent releases.
Implications For Inflation Expectations And Federal Reserve Policy
We see the May core inflation number of 0.2% as a significant downside surprise, confirming that inflationary pressures are finally easing. This is the first reading below 0.3% in over six months and provides the Federal Reserve with clear evidence to justify a more dovish stance. For us, this marks a pivotal shift in the market narrative for the coming weeks.
This data point dramatically changes the calculus for future interest rates. We believe this print significantly increases the probability of a rate cut by the September meeting, likely shifting market odds from below 50% to over 70% based on Fed funds futures pricing. The main theme now will be front-running this policy shift.
Market Positioning And Opportunities
Given this, we are looking at buying call options on the S&P 500 and Nasdaq 100, as lower rate expectations disproportionately benefit growth and technology stocks. A recent report showed nonfarm payrolls for May already cooled slightly, and this inflation data is the second piece of the puzzle needed for a sustained rally. We are adding to long positions in Nasdaq 100 futures (NQ) to capitalize on this.
We also expect Treasury yields to fall, so we are positioning for this by going long on 2-year and 10-year Treasury note futures. The 10-year yield has struggled to break below 4.30% this year, but this data could be the catalyst that sends it toward 4.10%. This move anticipates the market pricing in rate cuts well before the Fed formally acts.
This kind of data tends to crush market uncertainty, and we anticipate the Volatility Index (VIX) will drop below 12. Historically, downside inflation surprises have led to sharp declines in volatility, similar to the drop we saw in late 2023 when a soft CPI report sent the VIX from 15 to below 13. Selling VIX futures or buying VIX put options looks like a solid strategy to profit from the coming calm.
