Title: June US Core CPI Eases Slightly, Fueling Speculation on Fed Policy Path
Source: MarketPulse, authored by Kenny Fisher
The June reading of the US core Consumer Price Index (CPI) has shed new light on inflation dynamics and financial markets’ expectations regarding future Federal Reserve interest rate moves. On Thursday, the US Department of Labor reported that core CPI, which excludes volatile food and energy prices, rose by 0.2% month-over-month in June and 2.9% year-over-year. The annual figure came in just below economists’ expectations of 3.0%, hinting at a modest but meaningful decline in price pressures across the American economy.
This reading is significant for investors, economists, and policymakers alike, as it confirms a trend of easing inflation that could shift the outlook for US monetary policy. With inflation down and key benchmarks being met or even exceeded, the Fed’s next steps may include rate cuts sooner rather than later. Below, we explore the implications of the latest CPI data, the market reaction, and what it all might mean going forward.
Key Highlights from June’s CPI Report
• Core CPI rose 0.2% month-over-month in June
• Year-over-year core CPI increased by 2.9%, slightly below 3.0% forecast
• Overall CPI came in at 0.1% month-over-month and 3.0% year-over-year
• Shelter continued to be the main driver of monthly inflation trends
• Energy prices declined 2.0% month-over-month
• Food prices grew by a mild 0.1%
The minor dip in core CPI from May’s annual figure of 3.4% to 2.9% in June is particularly noteworthy. It marks the slowest pace of core inflation since early 2021, when inflation was beginning to climb in the aftermath of pandemic-era stimulus policies and global supply chain disruptions.
Fed Rate Cut Speculation Builds
The softer reading on inflation has increased speculation that the Federal Reserve may now have room to begin easing monetary policy. The central bank’s aggressive rate hikes since March 2022—totaling more than 500 basis points—have subdued consumer demand and borrowing across sectors.
With core inflation now under 3%, markets are beginning to price in the likelihood that the Fed has completed its cycle of rate hikes and could even cut rates as early as September. This stance contrasts with the earlier cautious outlook that anticipated sticky inflation and a higher-for-longer policy stance.
Market participants are increasingly factoring in the following:
• A potential September rate cut is gaining traction
• Futures markets now show up to two rate cuts priced in by the end of 2024
• The Fed’s dual mandate of inflation control and maximum employment is now benefiting from cooler inflation without significant weaknesses in the labor market
Market Reaction
Financial markets responded decisively to the inflation print. Investors seeking clarity on the future trajectory of interest rates took the CPI data as a green light to price in monetary easing sooner than previously believed.
• The US dollar weakened, with the DXY index dropping below the key 104 support level
• Treasury yields fell sharply, particularly at the short end of the curve
• The two-year Treasury yield, which is sensitive to rate expectations, dropped by more than 15 basis points shortly after the CPI release
• Gold prices rallied as the weakening dollar and falling yields made bullion relatively more attractive
• US equities rose, with the S&P 500 and Nasdaq hitting new intraday highs
Forex Market Movements
In currency markets, the US dollar saw broad-based weakness following the CPI report.
• EUR/USD surged to 1.0880 after the release, reversing earlier losses
• GBP/USD rose to 1.2890, capitalizing on both dollar softness and expectations of fewer rate hikes from the Bank of England
• USD/JPY fell sharply from around
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