Aldi supermarket in Alhambra, California, USA, Thursday, June 27, 2024.
Eric Thayer Bloomberg Getty Images
An anticipated inflation report on Thursday could strengthen expectations for the Federal Reserve to cut interest rates in the coming months.
The consumer price index (CPI) report for June will be out at 8:30 am ET. Recent economic releases have suggested that inflation and economic growth are both cooling, including last week’s report that unemployment in June ticked up to 4.1%.
Thursday’s report comes after Fed Chairman Jerome Powell testified over two days on Capitol Hill this week. The head of the central bank did not indicate when exactly the rate cuts would start. However, Powell said the Fed sees economic risks more balanced between inflation and recession and that the center does not need to wait until inflation reaches the 2% level to cut rates.
What to watch for
Economists surveyed by Dow Jones are looking for CPI to rise 0.1% monthly, and 3.1% annually. Core CPI, which strips out more volatile food and energy prices, is expected to rise 0.2% from May and 3.4% from June last year.
In May, the CPI was unchanged month-on-month and up 3.3% year-on-year.
Focusing on unemployment and inflation trends could bolster the case for rate cuts, said Matt Brenner, vice president, investment and product management at MissionSquare Retirement.
“The inflation rate is still elevated relative to the Fed’s target (2%). The unemployment rate is still historically low at 4.1%. The trajectory is downward,” said Brenner.
“For some time the Fed has focused more on the rate, and now it seems that they can start to tilt more to focus on the trend. And if that is small, then the possibility of the rate cut up,” added Brenner.
Price changes in the components that make up the CPI index will also be in focus on Thursday, especially if the number is different from expectations. Shelter services and medical care could be areas to watch, said Wilmington Trust chief investment officer Tony Roth.
Shelter and medical services are also a significant part of the personal consumption expenditure index, the Fed’s preferred measure of inflation, rather than the CPI.
“We’ve seen medical services (be) pretty tame, and that’s important because medical services make up the larger part of PCE, which is the more important of the two inflation prints,” Roth said.
Market impact
The CPI report comes when the market is on an upswing.
Stocks and bonds have both rallied in July as traders become more confident in the rate cut sometime this year. The S&P 500 crossed 5,600 for the first time on Wednesday.
The stock market has rallied in July, with the S&P 500 hitting another record high on Wednesday.
Fed funds futures indicate traders expect the Fed to hold rates steady at its meeting later this month, and then cut them in September, according to the CME FedWatch tool. A month ago, the possibility of rest in September were close to toss-up, according to the same tool, which uses 30-day feeding of futures funds to come up with the given probability.
An expected hold in July could keep Thursday’s CPI report from being a big market mover, Bank of America rate strategist Meghan Swiber said in a note to clients on Wednesday.
“Cooling activity and restrictions on short-term cut prices should limit the market’s response in either direction,” Swiber said.
However, Roth Wilmington Trust said stocks could rally if inflation readings are cooler than expected because some investors don’t worry about fears from earlier this year, when inflation was briefly hotter.
“I don’t think the market has appreciated the weakness of the economy, or the fact that inflation is clearly in the rearview mirror,” Roth said.
– CNBC’s Michael Bloom contributed reporting.