U.S. CPI returns to the "2% range"! The Fed's rate cut in September is basically stable
The U.S. July CPI year-on-year rate was 2.9%, lower than expected, slowing down for the fourth consecutive month, returning to the "2% range" for the first time. The market had some fluctuations in expectations of a 50 basis point rate cut. After the data was released, spot gold and the U.S. dollar showed significant short-term volatility. Despite some data meeting expectations, housing and rental prices continue to rise. Overall, this CPI report is considered to be in line with expectations and will impact the Fed's rate cut decision in September
US inflation slowed for the fourth consecutive month in July, making the Fed likely to cut interest rates next month.
The CPI data released on Wednesday showed that the unadjusted CPI year-on-year rate for July in the US was 2.9%, marking a fourth consecutive monthly decline and the first return to the "2-handle" since March 2021, below the market expectation of 3%. The monthly rate recorded 0.2%, in line with market expectations; the unadjusted core CPI year-on-year rate for July was 3.2%, also marking a fourth consecutive monthly decline to the lowest level since April 2021, with a monthly rate of 0.2%, all meeting market expectations.
Following the data release, spot gold quickly rose nearly $10 in the short term, then retraced slightly, with a short-term fluctuation of nearly $15; the US dollar index fluctuated more than 20 points in the short term; non-US currencies generally fell, with the euro against the US dollar dropping by 30 points in the short term; and the British pound against the US dollar dropping by over 30 points.
Although the data released by the US Bureau of Labor Statistics only has one decimal point, Fed officials and economists like to further observe to better understand the inflation trajectory. Calculated to two decimal places, the core CPI rose by 0.17% on a month-on-month basis. To understand recent trends, the three-month annualized rate rose by 1.58%, the lowest level since February 2021.
The largest category in the service sector, housing prices, rose by 0.4%, compared to 0.2% in June. Owner's equivalent rent—a subset of housing and the largest individual component of the CPI—also rose by 0.4%. Primary residence rents rose by 0.5%, the largest increase since February, which may raise questions after earlier fluctuations this year.
Montreal Bank Capital Markets believes that, while the stickiness of housing costs is a notable aspect of this report, overall, "this is very much as expected, and we maintain our basic assumption of a 25 basis point rate cut by the Fed in September."
Following this data release, interest rate traders reduced their bets on a 50 basis point rate cut at the Fed's September meeting, expecting a cut of around 33 basis points, compared to yesterday's expectation of 37 basis points.
Forexlive analyst Adam Button stated that the market's pricing of a Fed rate cut within the year decreased from 106 basis points before the data release to 103 basis points. This is a slightly hawkish response, indicating that the market had initially priced in more downside surprises. "Nevertheless, the unrounded inflation figure is better than the overall figure."
However, Lindsay Rosner, head of multiple fixed income departments at Goldman Sachs Asset Management, still believes that the possibility of a 50 basis point rate cut by the Fed in September remains, despite tonight's CPI data clearing the way for a 25 basis point cut, considering that there is more data to come in the future. The possibility of a 50 basis point cut has not been ruled out. **
As the economy slows down gradually and inflation continues to decline overall, coupled with a weak job market, people generally expect the Federal Reserve to start cutting interest rates next month, with the extent of the rate cut possibly depending on more upcoming data.
Ahead of the September meeting, officials will receive more inflation data and another non-farm payroll report. Following the disappointing July non-farm payroll data that triggered a global market sell-off and exacerbated concerns about economic recession, this report will be scrutinized closely. For Federal Reserve Chairman Powell and his colleagues, a substantial further weakening in the labor market will be more important than the "okay, but not great" CPI data.
Powell and his colleagues have recently indicated that they will pay more attention to their dual mandate of full employment, which they may emphasize at the annual symposium in Jackson Hole, Wyoming next week