Source: Caixin.

If one CPI is not enough to prove that the Fed can cut interest rates, then what about adding PPI?

On Thursday, with a series of latest economic data, it proved that U.S. inflation and labor market are cooling down, and U.S. bond yields are generally weakening again. The poor performance of many economic data releases recently seems to have greatly weakened the credibility of the Federal Reserve's hawkish stance to some extent - just one day after the Fed's interest rate dot plot indicated that there would be only one rate cut this year, the pricing of the interest rate swap market returned to the expectation that the Fed would cut interest rates twice this year.

This is almost a blatant challenge to the Fed.

Data released by the Bureau of Labor Statistics on Thursday showed that, like the CPI released the day before, all four key indicators of the May PPI - the year-on-year and month-on-month indicators for both overall and core PPI - were lower than market expectations!

Data showed that PPI fell 0.2% month-on-month in May, compared with an expected increase of 0.1%. From a year-on-year perspective, after a rise of 2.3% in April, the increase in May was 2.2%, also lower than the expected 2.5%. Excluding the volatile food and energy categories, core PPI rose 2.3% year-on-year in May, lower than the expected 2.4%; and core PPI was flat month-on-month, lower than the expected 0.3%.

The apparent decline in both CPI and PPI can already lead people to deduce one thing: namely, the Fed's most favored inflation indicator - the core PCE inflation index - is likely to hit a new low in the past six months in May.

From the details of index compilation, several key categories that make up the PPI index will also affect the PCE price index, which will be released later this month, along with weak CPI. Several Wall Street analysts have predicted that the core PCE price index for May will only increase by 0.1% month-on-month, providing more support for two interest rate cuts this year.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a report to clients: "Our analysis of PPI and CPI data suggests that the core PCE price index may rise by only 0.11% in May, well below the average increase of 0.32% in the first four months of this year." Shepherdson pointed out that the prospect of slowed rental growth, lower wage growth, and compressed retailer profit margins suggests that the rate of increase in the core PCE price index will continue to be slow than the economic forecast the Fed made this week, laying the foundation for the interest rate cut that will begin in September.

Other analysts also do not expect a significant increase in the core PCE index. Paul Ashworth, chief North American economist at Capital Economics, said the bank was expecting an increase of 0.11%. Citigroup economists predicted an increase of 0.15%.

In addition to PPI, the latest initial jobless claims data released on Thursday also confirmed that the once-robust U.S. labor market is faltering. For the week ended June 8, the number of initial jobless claims in the US was 242,000, significantly higher than the expected 225,000, and the highest weekly initial jobless claims since August last year.

It can be said that as inflation cools down and economic and employment indicators continue to weaken, to a large extent, the threat of stagflation facing the U.S. economy has clearly receded.

At the same time, the necessity of cutting interest rates at some point in the second half of the year is also increasing.

Judging from the latest pricing in the interest rate market, traders may be able to expect a 49.7 basis point interest rate cut by the Fed this year, in other words - at least two interest rate cuts have been basically priced in. People don't seem to believe the median forecast of only one rate cut this year shown in the Fed's June dot plot!

FedWatch Tool of CME Group shows that the market thinks that there is a 68% likelihood that the Fed will cut interest rates by at least 25 basis points at its September meeting, which continues to rise compared with the previous trading day.

In the US bond market, with the latest US economic data, yields on US Treasury bonds of various maturities fell further on Thursday. At the end of the New York session, the two-year US Treasury yield fell 5 basis points to 4.71%, the five-year US Treasury yield fell 7 basis points to 4.252%, the ten-year US Treasury yield fell 7 basis points to 4.249%, and the thirty-year US Treasury yield fell 7.6 basis points to 4.4%.

The 10-year US bond yield, known as the anchor for global asset pricing, has now closed at its lowest level in three months:

Collin Martin, a fixed-income strategist at Schwab Center for Financial Research, said: "When you look at the PPI today and the CPI yesterday, there is no doubt that inflation is coming down. Of course, a month's report cannot represent a trend, but we need to see such numbers and reports to be sure that inflation is coming down, and so can the Fed."

Some industry insiders even believe that the Fed's latest dot plot may be outdated based on the CPI and PPI data. It is worth mentioning that Fed Chairman Powell revealed that the CPI data had been initially included in the June meeting, "some people did update their forecasts, but most did not."