Weak inflation in US boosts confidence in returning to target

CPI below expectations: The Consumer Price Index (CPI) reading in the United States came in below expectations, strengthening the Federal Reserve’s confidence that inflation is heading towards reaching the 2% target sustainably. This weak inflation reading reflects a slowdown in price pressures, which supports expectations that the central bank may be in a position to cut interest rates soon.

Odds of cutting interest rates are increasing: The odds of lowering interest rates increased in September with these data. Some economic circles believe that the Fed may cut interest rates three times this year instead of just twice as markets expect.

The impact on the markets: Lowering interest rates may enhance economic activity and support stock markets, but it may weaken the US dollar due to reducing returns on US financial assets. It is also expected that this trend will have a positive impact on the bond market, as their prices will rise as a result of the interest rate cut.

Observers’ expectations: Analysts expect that the central bank will continue to closely monitor economic data before making any decisions regarding monetary policy. However, current data suggest that inflation could continue to decline, raising the odds of a further rate cut. So, the weak CPI reading supports confidence that inflation is heading towards the target, which opens the door to lower interest rates than expected. Investors should monitor market developments and the monetary policies of the US central bank in the coming period. The CPI for June came in below expectations, raising the odds of a rate cut by the Federal Reserve starting in September

Low inflation throughout

June Inflation Report: The June inflation report showed a surprisingly weak reading, which should bolster Federal Open Market Committee (FOMC) members’ confidence that inflation is heading toward the Fed’s 2% target.

Core Consumer Price Index: decreased by 0.1% on a monthly basis, while expectations indicated a rise of 0.1%.

Core CPI: rose 0.1% m/m, compared to consensus expectations of +0.2%.

Initial Jobless Claims In the same context, initial unemployment claims decreased by 17 thousand to 222 thousand, while continuing claims remained stable.

Impact of the report on the market: 10-year Treasury yield: fell below 4.20% for the first time since late March, reflecting the market’s reaction to the decline in the CPI.

Market Actions: A decline in Treasury yields indicates that investors expect interest rates to decline or at least stop raising them in the near future.

Analysis: Confidence boost: The weak inflation reading strengthens the Federal Reserve’s confidence that inflation is heading downward to the target, which could open the door to a more flexible monetary policy.

Interest Expectations: This report may contribute to increasing expectations of interest rate cuts at the upcoming Federal Open Market Committee meetings.

June’s weak inflation report reinforces the Fed’s confidence that inflation is heading towards its target, opening the door to the possibility of interest rate cuts in the near future. The decline in the 10-year Treasury yield reflects this optimism in financial markets, indicating expectations of improved economic conditions and monetary policies in the coming period. Core inflation: on a monthly basis%, on an annual basis during the first three months of the year%, and on an annual basis during the first three months of the year

Calls for interest rates to be cut three times in 2024

Latest Inflation Report Supports the Case for Cutting Interest Rates: The latest inflation report comes to reinforce ongoing calls to cut interest rates three times during 2024. The weak inflation reading clearly indicates that the Fed may start to ease monetary policy slightly from the current restrictive zone to a “less” zone. “a little more restrictive” in future meetings.

Key figures and expectations: Monthly inflation: The inflation index recorded 0.17% on a monthly basis. If this ratio continues throughout the year, it will achieve the annual inflation target of 2%. We have now recorded two consecutive readings below this threshold, indicating a marked slowdown in inflationary momentum.

September Rate Cut Expected: While a July rate cut remains unlikely, 23 basis points of a 25 basis point cut for September are now priced in. We are expected to see more evidence of a slowing labor market and slower growth in consumer spending between now and September.

Expected conference and messages from Jackson Hole conference: The Jackson Hole conference at the end of August is expected to be the place where the Fed will signal more explicitly that interest rate cuts are coming. The Fed seeks to avoid a recession and achieve a “soft landing,” which reinforces expectations of lower interest rates.

Future expectations: We see that the Federal Reserve will make three interest rate cuts this year, compared to the market pricing in only two cuts. This forecast is based on growing evidence of a slowing labor market and slower growth in consumer spending, as well as a marked slowdown in inflationary momentum.

The latest inflation report reinforces calls to cut interest rates three times in 2024, as the Fed seeks to achieve a “soft landing” for the economy and avoid a recession.

Housing is finally cooling and the CPI reading

The core CPI reading for the month showed 0.1%, rounded to three decimal places to reach 0.065%. This brought the three-month annual rate down to 2.1%, although the annual rate fell modestly to 3.3%. We were expecting a rise of 0.2% m/m, but a potential recovery in auto insurance was one of the factors that expected risks to be tilted to the positive side. This component rose by 0.9% on a monthly basis, which was lower than expected.

Housing inflation slows: We saw a slowdown in housing inflation recently, with housing inflation at 0.2% month-on-month, compared to 0.4% in previous months. Owners’ equivalent rent and base rent were 0.3% month-on-month, the lowest in three years. Hotel prices also fell sharply.

Medical care growth slows: The medical care sector also witnessed a slowdown in growth to 0.2% on a monthly basis after a series of readings of 0.4% and 0.5%.

Car prices and airline tickets: Prices of used and new cars witnessed a decline, while airline ticket prices decreased by 5% on a monthly basis.

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