The core CPI in the United States fell to a three-year low year-on-year in May, and the Fed's interest rate cut expectations in September rose

Wall Street Sights

2024-06-12 21:42Posted on the official account of Shanghai Wall Street News

U.S. inflation continued to fall, and the overall and core indicators rose less than expected across the board, which was a "surprise" for Fed officials who were looking for evidence of interest rate cuts.

On Wednesday, June 12, data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI increased by 3.3% year-on-year in May, a slight decrease from the previous value and the expected value of 3.4%; CPI rose 0% m/m in May, lower than expectations of 0.1%, also significantly slower than the previous value and the lowest level since July 2022. Among them, energy is still the biggest factor dragging down the month-on-month rise in CPI.

Core CPI, which excludes food and energy costs, rose 3.4% year-on-year in May, lower than expectations of 3.5% and lower than the previous value of 3.6%, the lowest level in more than three years. The month-on-month growth rate of core CPI in May fell to about 0.2% (actual value was 0.16%) from 0.3% in April, weaker than the expected 0.3%.

The Fed's focus on super-core inflation also cooled, falling 0.05% month-on-month, the first decline since September 2021, led by lower transportation service costs, but still above 5.0% year-on-year

After the release of the data, traders re-fully priced in the possibility of a rate cut by the Fed in November and expected two 25 basis point rate cuts this year, with traders also raising the probability of a September rate cut to 72%.

Energy inflation has fallen, housing price growth has declined, and core services inflation has slowed markedly month-on-month

By sector, rising housing costs remain the biggest headwind to inflation, while the accelerating decline in energy prices has led to a slowdown in inflation:

The energy index fell 2% for the month, the gasoline index fell 3.6%, and the fuel index fell 0.4%.

Housing costs, the largest category in the services sector, rose 0.4% for the fourth consecutive month, while transport services fell 0.5% in May after rising 0.9% in the previous month;

The new car index fell 0.5% month-on-month, the used car index reversed its decline, and the price of medical and health care goods rose sharply by 1.4%.

It is worth mentioning that core services inflation slowed markedly month-on-month, with prices of services other than housing and energy broadly unchanged from April and the lowest since September 2021.

Housing inflation, which is heavily weighted by the CPI, slowed and rose 0.4% month-on-month. Among them, the housing inflation rate fell by 5.41% year-on-year, the lowest level since April 2022; Rental inflation fell 5.30% year-on-year, the lowest level since May 2022.

Overall, the trend of stubborn services inflation and slowing goods inflation continued, with services inflation remaining above 5% and goods inflation at its lowest level since January 2004.

Expectations of a Fed rate cut in September have risen

投资公司AmeriVet Securities美国利率交易和策略主管Gregory Faranello表:

The May CPI report was a "very good inflation data" and this trend is expected to continue. Today's Fed meeting should see officials "moving towards two rate cuts in 2024", while weaker CPI data from now on will keep September rate cut expectations rising.

分析师Cameron Crise指出：

The CPI data brought a long-awaited downside surprise to bond bulls and the Fed. Both headline and core CPI came in 0.1% below expectations, which looks justified given the gap between the actual index and the forecast.

In fact, the core index rose by 0.16%, which is almost only 0.1% after rounding. The super-core services sector, excluding housing, fell by 0.04%, the first negative growth since September 2021. This makes two rate cuts in 2024 possible and opens the door for the market to price in more rate cuts in 2025.

Mona Mahajan, senior investment strategist at Edward Jones, believes that the Fed will need to wait for 2-3 times of weak data before cutting interest rates:

This could reset the plan for the Fed. Until they get the confidence they need to really start signaling rate cuts, they still want to see maybe two or three times of data moving in the right direction. We are still waiting for a significant drop in housing and rents, and we are also watching the cooling of the labor market and wage growth.

The report comes hours before the Fed's FOMC decision, where Fed officials are widely expected to keep interest rates at 20-year highs for the seventh time in a row, along with an updated "dot plot" and quarterly economic projections.

Fed officials can still adjust their quarterly economic forecasts based on the CPI data, and Fed Chair Jerome Powell said that adjustments will be made when important data is released during the meeting, which has happened before.

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