As the U.S. economy and labor market gradually show signs of weakness, the latest price report has attracted much attention from the market because it may affect the timing of policy shifts. In the July resolution statement, the Fed reiterated that it would only consider taking action when they are more confident that inflation is moving toward the 2% target. Therefore, this data may provide more basis for policy adjustments in September and become a catalyst for market fluctuations.
Inflation growth rate picks up
Since March this year, U.S. prices have resumed a downward trend. The June CPI report is one of the most encouraging reports the Federal Reserve has received since it started its current interest rate hike cycle. CPI fell 0.1% month-on-month, the first decline since May 2020, as lower gasoline costs and slower rents put inflation firmly back on track. Excluding food and energy, core CPI edged up 0.1% in June, the smallest increase since early 2021. Among them, core service prices increased by 0.1%, which was a significant improvement compared with the previous average monthly increase of 0.4%.
Previously, the agency predicted that the July data might show a divergent trend. The overall CPI rebounded 0.2% in July, which would stabilize the 12-month change at 3.0%, a more than three-year low. Although gasoline prices rose 1% this month, grocery store prices may have changed little amid more stable input prices and increased promotional activities.
The agency predicts that the core CPI will increase moderately by 0.2% month-on-month in July, mainly due to a rebound in some volatile "super core" components, and the core inflation rate will drop slightly to 3.2% year-on-year.
Looking at the sub-indicators, as the core commodity inflation rate is already lower than the pre-epidemic level, more substantial cooling of the service industry is needed to continue to push down the core inflation rate.
Housing costs (including rent) rose modestly by 0.2% after rising 0.4% in May, and the sustainability of this rise remains to be seen. Wells Fargo Bank said in a report sent to the First Financial reporter that after the sharp decline in the unstable travel service category in June and the below-trend growth in medical services, the monthly growth in July will be driven by the "super core". However, the monthly rate estimate of core inflation of 0.2% will still be significantly lower than the average increase of 0.40% in the first six months of this year.
Looking ahead, inflation is expected to continue to dissipate in line with trend over the next few quarters, but remain above the Fed's target. With unit labor costs below 2%, labor market conditions no longer pose a threat to the Fed's inflation target. Although services inflation has been cooling at a slower pace than goods inflation, it should benefit from slower growth in physical input costs.
Beware of new volatility risks
Federal Reserve Chairman Powell said in testimony before the U.S. Congress that price pressures have improved, but he is not ready to declare that inflation has been defeated, and "more good data" will strengthen the case for a rate cut.
But there are growing signs that the labor market is losing momentum and economic activity is cooling as the Federal Reserve raises interest rates aggressively in 2022 and 2023. The unemployment rate rose to 4.3% in July from 4.0% in May. Since June, the number of people applying for unemployment benefits this year has hovered at a high level for the year.
The New York Fed’s second-quarter household debt and credit report, updated last week, showed that even as credit continues to increase, the pace of debt growth has slowed in recent quarters, suggesting that consumers may be feeling the pinch of rising interest rates.
Sal Guatieri, senior economist at Bank of Montreal, said in an interview with China Business News that as commodity prices continue to face demand-side pressure, the outlook for core service prices has eased for the rest of the year, and the Federal Open Market Committee's dual mission is to better balance inflation and labor risks.
Federal funds rate futures show that the probability of a 50 basis point rate cut in September has dropped from a high of nearly 80% to around 50%. Guatieri believes that although there is no sign that the Fed needs to cut interest rates in a hurry, the basis for a rate cut in September is slowly forming because the Fed's policy focus is gradually shifting from prices to the economy. He told China Business News that an unexpected rise in the unemployment rate could trigger the "Sam Rule" and raise concerns about a recession, giving the impression that the Fed is lagging behind the yield curve, but there are no obvious danger signs in the overall job market, and one should not overreact to a report.
ING Group predicted last week that the Fed's first rate cut could be 50 basis points. Carsten Brzeski, the agency's global macro director, expects the fund rate to fall to around 3.5% by next summer. "We see the Fed acquiescing to some market concerns and could take a 25 basis point or 50 basis point rate cut right away, allowing them to quickly shift policy to a more neutral stance. With weak business surveys, a rapid cooling in hiring, inflation approaching 2%, and unemployment exceeding expectations, the Fed could argue that it should act sooner than previously expected."
It is worth mentioning that after the global capital market was panicked by the July non-farm report, investors are paying more attention to the performance of the next US economic data. Last week's favorable initial jobless claims report once stimulated the S&P 500 index to record the largest single-day increase in nearly two years. If the July CPI is significantly higher or lower than expected, it may trigger another round of market chaos. Citi warned that the volatility of US stocks will reach 1.2% by then, which is consistent with the volatility of Powell's Jackson Hole speech and Nvidia's financial report. #内容挖矿 #BTC Follow me! Get more information about the cryptocurrency circle!