Data released on Wednesday showed that the annual rate of US CPI in July, before being seasonally adjusted, was 2.9%, which is the first time it has been below 3.0% since March 2021 and lower than the general expectation; The annual rate of core CPI was 3.2%, still the slowest growth rate since the beginning of 2021, and the monthly rate was 0.2%.
After the release of US CPI, the probability of a 50 basis point rate cut by the Fed in September slightly decreased to 43.5%.
Some economists believe that the labor market must deteriorate significantly before the Fed can cut rates by 50 basis points. Win Thin, head of global market strategy at BBH, said that it is still too early to draw conclusions, but the trend so far suggests that after yesterday's US PPI data was released, the market expects CPI data to be generally lower than expected. Therefore, today's result is disappointing for the market with a dovish expectation.
Gennadiy Goldberg, director of US interest rate strategy at TD Securities, said that the surprise in the CPI report was that rents were accelerating. This is why the market is somewhat disappointed. The data for 'owner's equivalent rent' in June hit the lowest level since 2021, but this indicator accelerated to 0.36% in July. Despite this, it is still lower than the growth rate usually seen in the past few years. As this indicator has a slightly lower weight in core PCE, it means the Fed's favored inflation indicator will be slightly lower than CPI. This will certainly allow the Fed to cut rates in September, but it does not necessarily increase the possibility of a 50 basis point cut. The Fed is likely to choose to slow down the pace of the first rate cut and then consider a larger rate cut.
Rusty Vanneman, CIO of Orion, said that considering today's CPI and yesterday's PPI data, as well as short-term inflation expectations based on market and survey both declining to multi-year lows, the probability of a rate cut by the Fed in September is still high. Just that the market believes that inflation is more troublesome than the Fed expected, so it reassesses the probability of a 50 basis point rate cut in September.
With inflation below the psychological threshold of 3%, investors' attention can obviously shift from inflation to economic growth and employment. For Powell and his colleagues, substantial further weakening of the labor market will be more important than CPI data, which is 'okay, but not very good'.
Analysts believe that CPI data has a small impact, and the rate cut will still be more affected by employment data. Jack Mcintyre, an investment manager at Brandywine Global, said: 'US CPI data is very important, but in terms of its impact on the market, it may rank third in the hierarchy of economic data - employment, retail sales, and inflation, so it is not that important.' He said, 'this obviously gave the Fed room for rate cuts, so it tells you that inflation is developing in the right direction. The longer the Fed is inactive, the more restrictive monetary policy will be.'
He believes that inflation data cannot determine the degree of rate cut, and the degree of rate cut will be determined by growth-oriented economic statistics, especially labor statistics and employment figures.
Of course, some analysts believe that the reason for the 50 basis point rate cut in September is obvious. For example, Nigel Green, an analyst at deVere Group, said that the reason for a significant 50 basis point rate cut in September is obvious, because it sends a strong signal that the Fed is serious about guiding the US economy away from the edge of recession.
Editor/Lambor