The United States export price index rose 1.3% month on month in May, coming in above forecasts of 1.2%. The data point indicates export prices increased slightly more than expected over the month.
On a monthly basis, the gap between the actual reading and the forecast was 0.1 percentage points. This places May’s export price inflation at 1.3% MoM versus a 1.2% consensus estimate.
Persistent Inflation and Implications for Federal Reserve Policy
We see this higher-than-expected export price data as a clear sign that inflation remains persistent. This report counters the narrative that inflationary pressures were steadily cooling off for the second half of the year. This latest figure, coming on the heels of the May CPI which registered a 3.1% annual increase, complicates the Federal Reserve’s path.
Our focus immediately shifts to interest rate derivatives, specifically options on SOFR and Fed Funds futures. The market had been pricing in a near 70% chance of a rate cut by September, but this data likely pushes that timeline out to December or even into 2027. We are adjusting positions to reflect a reduced probability of any rate cut before the fourth quarter.
Market Impact: Equities, Currency, and Commodities
For equity indices, this news increases downside risk as the prospect of higher rates for longer weighs on valuations. We are seeing a spike in the VIX from its recent lows around 14, suggesting a move towards protective put buying on the S&P 500 and Nasdaq-100 is warranted. Volatility is likely to be the main theme for the next few weeks.
The prospect of a more hawkish Fed is immediately bullish for the U.S. dollar. The Dollar Index (DXY), which had been consolidating around the 106 level, now looks poised to challenge its year-to-date highs. We view long dollar positions against currencies with more dovish central banks as an effective way to trade this divergence.
This strength in export prices also reflects the recent rise in underlying commodity costs, with WTI crude oil having climbed back above $90 a barrel last week. This suggests continued strength in the energy sector and related derivatives. However, traders should be cautious as a significantly stronger U.S. dollar can eventually act as a headwind for commodity prices.
