The long-awaited cooling of housing inflation has finally arrived, and the US June core CPI has hit a new three-year low. This signal provides a strong basis for the Fed to cut interest rates, and the market has fully priced in two rate cuts this year!

According to the latest overnight data, June inflation in the United States was 'cold', with monthly CPI and core CPI once again lower than market expectations:

The CPI fell by 0.1% month-on-month, the first negative since May 2020, mainly due to the decline in gasoline prices.

Excluding food and energy, the core CPI rose by only 0.1% month-on-month, the smallest increase since August 2021, mainly due to the slowdown in housing cost growth.

The biggest 'highlight' of this inflation report is the rapid cooling of stubborn housing inflation, which fell from 0.40% to 0.17% month-on-month. Previously, housing inflation had been at a high level for a long time and was the biggest 'roadblock' to interest rate cuts.

This has given the Fed the confidence it needs to cut interest rates, and the market generally expects the Fed to cut interest rates starting in September. After the CPI report was released on Thursday, traders almost completely bet on two rate cuts by the Fed in September and December.

Chief Economist Joseph Brusuelas of RSM US LLP said in a report:

We are confident that even if the Fed is not ready to admit it, the inflation rate is returning to the 2% target, and the road to a Fed rate cut in September is clear.

Stubborn housing inflation has clearly cooled down.

Looking at the individual categories, housing prices are the largest category in services, with a month-on-month increase of about 0.2%, the smallest increase since August 2021. Equivalent rent for owners increased by 0.3% month-on-month, and also reached a three-year low.

Founder and former Fed economist Julia Coronado of MacroPolicy Perspectives LLC said:

The most important aspect of the June report may be the decline in housing inflation. Many Fed officials have said that it looks broad-based and persistent, and this decline will increase their confidence that the inflation rate will indeed rebound sustainably to 2%.

In addition to housing costs, other service prices, such as airfares, hotel accommodation and medical expenses, also fell month-on-month. Core commodity prices generally fell, with new and used car prices leading the decline in core commodity prices.

For most of the past year, commodity prices have continued to decline, largely easing consumer concerns. In June, the 'core commodity prices' excluding food and energy goods fell for the fourth consecutive month. Among them, new car prices have fallen for the sixth consecutive month, and prices for various clothing categories have also fallen. The price of housewares has fallen almost every month over the past year.

Interest rate cuts in September are a sure thing, and even July is possible?

Following the cooling of non-farm payrolls in the United States in June and Powell's mention of a nearly rate cut, the cold June CPI further boosted expectations of a rate cut.

Many economists believe that this inflation data shows that US inflation is steadily falling back to the 2% target level. The significant slowdown in housing inflation is particularly encouraging, which will enhance the Fed's confidence in a sustained decline in inflation.

After the release of CPI in June, US government bonds rose, and the market has almost fully digested expectations of a rate cut in September and December, while also raising the likelihood of a rate cut in November to over 50%.

Bloomberg economist Anna Wong said:

The June CPI report is better than the 'very good' report in May, which should increase the FOMC's confidence in the inflation trajectory, lay the foundation for the Fed's rate cut in September, and even suggest an early rate cut in July.

HTSC believes that:

It is highly likely that the Fed will cut interest rates in September, as nominal growth is declining rapidly. Advancing the rate cut to July is more logical in terms of reasoning, but it is rather hasty in terms of timing.

The Fed is highly likely to communicate its intention to cut interest rates in September at the Jackson Hole Symposium in mid-to-late August, but it is not ruled out that the Fed may hint at it during the July 31st FOMC meeting.

Overall, the June inflation data cleared the way for the Fed to start cutting interest rates in September. Fed officials may release more policy signals at the end of July meeting, and the market will closely monitor Powell's speech at the Economic Club of Washington on Monday next week for more policy guidance.

Editor/Somer