US Core CPI Increase Rate in April Hits Lowest in 3 Years... Growing Expectations for Rate Cut in September

Core CPI in April up 3.6% YoY
In line with forecasts... Lowest since April 2021
US 10-year Treasury yield plunges... New York stock market rises

The core Consumer Price Index (CPI) inflation rate in the United States last month was reported to be the lowest in three years. As the inflation that had been hot earlier this year cooled down, expectations for the Federal Reserve's (Fed) interest rate cuts have been revived. The market sees the possibility of a rate cut in September at over 70%.

On the 15th (local time), the U.S. Department of Labor announced that the core CPI in April rose 3.6% year-on-year. This matched the forecast (3.6%) and was below the previous month's increase (3.8%). Notably, it recorded the lowest level in three years since April 2021. The month-on-month increase was 0.3%, in line with the forecast (0.4%) but lower than the previous month (0.4%).

The core CPI excludes volatile energy and food prices, showing the underlying trend of inflation, making it one of the inflation indicators that the Fed pays the most attention to.

The headline CPI rose 0.3% month-on-month and 3.4% year-on-year. These figures were below or in line with market expectations (0.4% and 3.4%, respectively) and both were lower than the previous month's results (0.4% and 3.5%, respectively).

Housing costs and gasoline price increases accounted for more than 70% of the CPI rise. Housing costs increased by 0.4% month-on-month, maintaining the March increase (0.4%). Gasoline prices rose 2.8%, significantly exceeding the previous month's increase (1.7%). As a result, energy prices jumped 1.1%, expanding the increase compared to March (0.3%). Service sectors such as auto insurance and healthcare also contributed significantly to the April CPI increase.

With last month's CPI growth slowing and meeting expert expectations, the market is showing a sense of relief. The CPI inflation rate from January to March this year consistently exceeded market forecasts, completely dampening hopes for a rate cut in the first half of the year. Fed Chair Jerome Powell also attended the Foreign Bankers Association (FBA) annual meeting held in Amsterdam, Netherlands, the day before, stating that inflation figures were "higher than expected" and that "we need to be patient and allow restrictive monetary policy to take effect."

Following the release of the CPI data, expectations for rate cuts have revived, causing bond yields to decline. The U.S. 10-year Treasury yield, a global benchmark for bond yields, fell 7 basis points (1bp = 0.01 percentage points) from the previous trading day to 4.37%, while the 2-year Treasury yield dropped 6 basis points to around 4.75%.

U.S. retail sales last month also stagnated, boosting expectations for economic slowdown and rate cuts. According to the U.S. Department of Commerce, April retail sales stood at $705.2 billion, unchanged from the previous month. This was well below both the market forecast (0.4%) and the previous month's result (0.6%). Retail sales are considered a key indicator for assessing the overall economic trend, as they account for two-thirds of the U.S. real economy. The data was interpreted as a signal that the U.S. economy may slow down due to pressure on household spending from inflation and high interest rates.

Investors also increased their bets on rate cuts. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market reflected nearly a 72% chance that the Fed would cut rates by at least 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting in September, up from 65% the previous day.

Charles Schwab's Chief Bond Strategist, Cash Jones, analyzed, "The door to a potential rate cut at the end of the year has opened," adding, "The Fed will need a few more data points showing that inflation is slowing before taking action."

Meanwhile, the three major New York stock indices are all rising in early trading. As of 9:36 a.m. on the day, the Dow Jones Industrial Average was up 0.56% at 39,781.55. The large-cap S&P 500 index rose 0.56% to 5,275.87, and the tech-heavy Nasdaq index was trading up just under 0.62% at 16,613.39.