Source: Jin10 Data

Morgan Stanley strategist said on Friday that as key data further shows that inflation in the United States and the eurozone is cooling, both the Federal Reserve and the European Central Bank may take action to cut interest rates in September.

Morgan Stanley Managing Director and Cross-Asset Strategy Head Andrew Sheets told CNBC that recent consumer price index (CPI) and labor market data in the United States and the eurozone have made the bank more optimistic about the prospect of rate cuts by the world's two major central banks.

He told Squawk Box Europe in an interview: "We are more optimistic that the Federal Reserve and the European Central Bank will cut interest rates in September."

Earlier this month, the two central banks showed signs of diverging monetary policies, with the ECB implementing its first interest rate cut in nearly five years, while the Fed insisted that U.S. inflation was still too high and would not take similar measures.

"It is understandable that these central banks are unwilling to make promises in advance. They do not want to be seen as complacent about inflation risks," Sheets said.

"We believe that the data that the ECB will see before its September meeting will show that inflation continues to slow. And for the Fed, I think inflation will continue to decline," he added.

The eurozone's inflation rate unexpectedly rose by 0.2 percentage points month-on-month in May, with a year-on-year growth rate of 2.6%. The fluctuation of inflation is in line with expectations due to the base effect of the energy market and the lifting of support measures by EU governments.

Meanwhile, the latest CPI data released earlier this month showed that the U.S. inflation rate in May remained stable, improving slightly from the 0.1% monthly increase expected by economists, but up 3.3% from the same period last year.

The May core personal consumption expenditures price index (PCE), which was closely watched by the market on Friday, matched expectations and the year-on-year growth rate fell to its lowest level in more than three years. This is the inflation index that the Fed prioritizes. More importantly, mild inflation is not only due to the fall in oil prices, but also to the support from the service sector. The cost of services rose modestly by 0.2% in May, the smallest increase since August 2023.

In addition, data released later on Friday showed that consumers' confidence in continued slowing of inflation was evidenced, but many were concerned about the impact of high prices and falling incomes on their finances. These trends offset improvements in short- and long-term business prospects, which were partly driven by expectations of softer interest rates. Nevertheless, current market sentiment is still about 36% higher than the low point in June 2022.

According to the University of Michigan's consumer survey, the one-year inflation rate expectation in the United States fell from 3.3% last month to 3.0% this month, while the long-term inflation expectation remained at 3.0% for the third consecutive month, with a significant degree of stability over the past three years, but still higher than the range of 2.2% to 2.6% in the pre-pandemic two years.

Most economists surveyed by Reuters currently expect the Federal Reserve to cut interest rates from the current range of 5.25%-5.50% in September this year and further cut rates later this year; they also expect the European Central Bank to cut interest rates in September and December.

Editor/Lambor