June CPI increase rate 3%... Slowdown for three consecutive months
Housing cost increase rate lowest in 2 years and 10 months
September rate cut forecast 93%... Government bond yields plunge
Wall Street "Fed expected to cut rates twice by year-end starting September"
The US consumer price index (CPI) inflation rate for last month declined for the third consecutive month, strengthening expectations for an interest rate cut in September. In particular, the housing cost inflation rate, which had been holding back the CPI slowdown, hit its lowest level in about three years, leading to predictions that the 'disinflation' phase will fully take hold. The overheated labor market is also showing signs of cooling, prompting Wall Street to anticipate that the Federal Reserve (Fed) will initiate a pivot in September and cut interest rates twice before the end of the year.
'Main culprit of inflation' housing costs hit lowest in 3 years... June CPI rises 3% YoY, slowing for third consecutive month
On the 11th (local time), the US Department of Labor announced that the June CPI rose 3% year-on-year. This is the lowest level since June last year and marks the third consecutive month of slowdown. Both the market forecast (3.1%) and the previous month's figure (3.3%) were exceeded. Compared to the previous month, it turned down by 0.1%, falling short of both the forecast (0.1% increase) and the previous month's figure (0%).
The core CPI, an inflation indicator closely watched by the Fed, rose 0.1% month-on-month and 3.3% year-on-year, both marking the lowest increase in about three years. These figures are below market expectations (0.2% and 3.4%, respectively) and the previous month's numbers (0.2% and 3.4%). The core CPI excludes volatile energy and food prices, helping to assess the underlying trend of inflation.
Notably, the housing cost inflation, which accounts for one-third of the CPI components, has begun to slow. Housing costs rose 0.2% month-on-month, the smallest increase in 2 years and 10 months since August 2021. Year-on-year, it increased by 5.2%. Among housing cost subcategories, rent rose 0.3% month-on-month, also marking the lowest increase in three years. With the housing cost inflation, previously a persistent driver of sticky prices, easing, there are expectations that inflation will decline more substantially going forward. Gasoline prices also contributed significantly to the CPI slowdown, falling 3.8% month-on-month and 2.5% year-on-year. Prices for new cars, used cars, and transportation services also declined.
Julia Coronado, founder of research firm Macropolicy Perspectives and a former Fed economist, analyzed, "The most important aspect of the June CPI report is the decline in housing cost inflation, which is expected to persist broadly going forward. This will reinforce the confidence among many Fed officials that inflation will sustainably slow to 2%."
93% chance of rate cut in September... Wall Street expects Fed to cut rates twice in September and December
With last month's CPI report signaling disinflation, market expectations for a rate cut in September are rapidly spreading. Analysts believe the foundation for a September pivot has been laid, following a cooling labor market and slowing inflation. The US unemployment rate in June was 4.1%, the highest in two and a half years. The number of job openings per unemployed person was 1.22 in May, the lowest since 2021. Fed Chair Jerome Powell is also seen as having signaled a rate cut in September during his semiannual monetary policy testimony to Congress on the 9th and 10th. Powell warned that "if policy constraints are eased too late or too little, economic activity and employment could weaken excessively," indicating a gradual shift in Fed policy focus from price stability to full employment. The day before, he hinted at the possibility of cutting rates before inflation reaches 2%.
Investors are treating the September rate cut as a foregone conclusion. According to the Chicago Mercantile Exchange (CME) FedWatch tool on the day, the federal funds futures market reflects a 92.7% probability that the Fed will cut rates by at least 0.25 percentage points at the September Federal Open Market Committee (FOMC) meeting. This is a nearly 20 percentage point jump from the previous day's 73.4%. Treasury yields have also fallen significantly. The US 2-year Treasury yield, sensitive to monetary policy, dropped 12 basis points (1bp = 0.01 percentage points) to 4.51%, while the US 10-year Treasury yield, a global bond benchmark, fell 7 basis points to around 4.2%.
Skyler Waynand, Chief Investment Officer (CIO) at Regan Capital, said, "With another positive CPI indicator, the door to a rate cut as early as September has opened. If inflation data continues to cooperate, the Fed is likely to cut rates once more in December."
However, despite growing expectations for a rate cut, the New York stock market closed mixed amid a sharp decline in the 'Magnificent 7.' The Dow Jones Industrial Average rose 0.08%, but the S&P 500 and Nasdaq indices fell 0.88% and 1.95%, respectively. Analysts suggest that investors have been taking profits by selling the previously surging large tech stocks and rotating into small- and mid-cap stocks, dividend stocks, and value stocks.
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