Thursday’s highly anticipated June CPI release will likely shape market sentiment regarding potential Federal Reserve rate cuts. Recent economic data, including rising unemployment, suggests both inflation and economic growth are cooling.
Federal Reserve Chairman Jerome Powell acknowledged a more balanced risk outlook for inflation and recession in his testimony to Congress this week. He hinted at the possibility of rate cuts without waiting for inflation to hit the 2% target.
Economists forecast a 0.1% monthly increase and a 3.1% annual increase in the consumer price index. The core consumer price index, excluding volatile food and energy prices, is forecast to rise 0.2% from May and 3.4% year-on-year.
Market observers like Matt Brenner of MissionSquare Retirement believe that inflation and unemployment trends will be key factors in determining rate cuts. He points to rising unemployment and declining inflation as indicators that support this view.
Attention will also be paid to specific components of the CPI, such as hospitalizations and medical services, which can have a significant impact on the overall index. Tony Roth of Wilmington Trust highlights the importance of these factors for the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge.
The next CPI report coincides with a market recovery. Both stocks and bonds rallied in July on growing confidence that the Fed will cut rates later this year. The S&P 500 even hit an all-time high on Wednesday.
While markets currently expect the Fed to hold rates in July, a cut is expected in September. However, Bank of America’s Meghan Swiber believes the July hold could limit the impact of the CPI report on markets.
On the other hand, Wilmington Trust’s Roth suggests that stocks could rally if inflation data falls short of expectations, as some investors remain fearful of previous inflation spikes.
The CPI report is a crucial piece of the puzzle for the Fed as it navigates the economic landscape. The data will likely influence market behavior and potentially pave the way for a shift in monetary policy.