Today's CPI data is somewhat difficult to interpret. Firstly, the overall inflation is declining, which is a good thing. Both the nominal CPI (CPI year-on-year) and the core CPI are decreasing, indicating that even with the 20% tariffs imposed by China, inflation in the United States has been brought under control. One could say that without external interference, the Federal Reserve could see a path for inflation to return to 2%.

However, the monthly CPI surprisingly turned negative, which indicates that inflation has turned into deflation. This data is not very friendly, as deflation generally means a decrease in purchasing power and insufficient demand, usually accompanied by weakening employment, rising inventories, and shrinking manufacturing. In simpler terms, deflation represents a downturn in the economy.

Moreover, for the Federal Reserve, deflation is even scarier than inflation, as it means an increased debt burden, declining asset prices, and a comprehensive contraction in investment and employment.

As a result, the market has heightened expectations for a rate cut in June, which also corresponds to increased expectations for a downturn in the U.S. economy, leading to declines in risk markets.

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