(Bloomberg) — The world’s biggest bond market rallied as further signs of disinflation reinforced bets the Federal Reserve will be able to cut rates soon.
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Treasury yields tumbled across the curve, with Fed swaps projecting more easing in 2024 — and almost fully pricing a September rate reduction. Equities had a bit of hard time picking up traction after the S&P 500’s longest rally this year spurred concern about an overbought market. Some disappointing corporate outlooks also weighed on stocks.
The so-called core consumer price index — which excludes food and energy costs — climbed 0.1% from May, the smallest advance since August 2021. The year-over-year measure rose 3.3%, also the slowest pace in more than three years.
Treasury 10-year yields dropped 10 basis points to 4.19% — with the market also tasked with absorbing a $22 billion sale of 30-year bonds. The S&P 500 fluctuated near 5,635. Delta Air Lines Inc. drove an industry selloff on a bearish outlook. PepsiCo Inc. sank on weaker-than-expected revenue growth.
The dollar dropped against all major currencies. The yen jumped 2%, prompting a new round of chatter on whether Japan was intervening to support its currency.
Wall Street’s Reaction to CPI:
These CPI reports are like a tic-tac-toe board, two in a row isn’t enough to claim victory, but it is a significant step forward after a years-long unrelenting inflation force.
The FOMC meeting in September is probably truly “live” in the sense that rate cuts are on the table for serious consideration, setting up the potential for the Fed to cut at each of its three meetings to close out the year, as easing inflation allows it to focus on both sides of its dual mandate.
The cool inflation print, combined with a weakening economy and labor market, indicates that the Fed should cut in July, but probably won’t due to its flawed policy framework and propensity to be behind the curve. We do believe that the Fed will definitely cut by September.
The September Fed cut will usher in a wave of continued central bank cuts which will require a large injection of liquidity into the global banking system. Historically, large injections of liquidity cause rallies in both stocks and bonds.
With abundant signs of a cooling economy, the Consumer Price Index for June certainly constitutes the “more good data” on inflation that Fed Chair Jerome Powell has said we need to see before the Fed can begin cutting interest rates.
This aligns with a September interest rate cut.
Inflation continues to moderate. Septembwer cut is a lock I believe.
I’ll argue again though, the battle with inflation is being won but the outcome of the war is yet to be determined and will only be when we have a SUSTAINED period of low inflation.
The inflation fight is entering a new phase as the data clearly demonstrate — the economy is cooling and so is inflation.
With a major deficit fight looming in 2025, chances are the Fed will have to be more aggressive than folks currently appreciate.
The Fed will be very pleased with the June CPI report. In fact, inflation was so subdued, FOMC members may start to worry they have kept policy tight for too long.
A 10 basis-point drop in 10-year yields suggest bond traders are not just expecting quick cuts, they are starting to price in more cuts, too.
This will not make July viable — but September looks likely. But beware we still have to bid on a long bond.
Given that the next Federal Reserve meeting is less than three weeks away, the market is currently pricing in that the Federal Reserve will skip that meeting and make their first cut in September.
Maybe more importantly, the market is now expecting three cuts by the end of January 2025. Chair Powell recently said that the risks towards inflation are now more “balanced.” Today’s number reinforces that view and perhaps now tilts the scale towards concerns of a sharper slowdown in the US economy.
Given rising inventories in housing, this sizeable component of the price index is finally starting to give the Fed what it needs to see for rate cuts. Goldilocks is here and a September cut looks more likely than ever.
Our base case is still a half point cut in December but we now think there is a decent chance for a September cut.
The belly of the curve will benefit the most. We really like the 5-year here.
When combined with the recent weakness we’ve seen in the labor market, this likely has the Fed readying a rate cut. Some investors may be wondering if a July cut could be in the cards. While that may be too soon for the Fed, a September cut should be the base-case expectation.
Energy and goods both weighed on the CPI results, while the stickier services component has finally started to cool a bit. If this trend continues, it certainly points to lower rates from the Fed, which is still trying to orchestrate a soft landing.
Since the federal funds rate (5.25%-5.00%) remains above nominal GDP growth of approximately 5.0%, we look for two cuts in the coming months to ensure monetary policy gets less restrictive. Beyond that, however, investors should be careful what they wish for…if the Fed cuts much beyond that, it will be because the Fed HAS to cut! That is not an environment conducive for economic or market growth.
The June 2024 CPI result brings a September 2024 Fed Funds rate cut into the picture.
Commentary from Fed officials should soon begin leaning toward optimism that their goal of an average 2.0% pace of consumer price growth is attainable, as opposed to recent rhetoric that has been ever wary of risks and pitfalls along the road ahead. And if a few more months’ worth of inflation’s current downward trend can be secured, actions on interest rates will surely follow that rosier talk.
A lot can happen between now and September, but unless most of the numbers pivot back into “hot” territory, the Fed’s reasoning for not cutting rates may no longer be justified.
CPI qualifies as “more good data.”
With Fed officials also apparently getting a little more nervous about labour market weakness, it does strengthen the case for a September rate cut.
One word: pivotal.
With three inflation prints between this morning and September’s Fed meeting, today’s print was crucial in helping the Fed gain confidence inflation is still moving in the right direction.
Cool CPI puts a September rate cut clearly in play.
For the market, clearly the preferred basis for easing rates is predicated on inflationary pressures cooling at a steady pace rather than on an economy losing momentum.
Corporate Highlights:
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Delta Air Lines Inc. forecast a quarterly profit short of Wall Street’s expectations as heavy competition in the domestic market drives ticket prices down, dragging the carrier’s shares and pressuring rivals across the industry.
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Pfizer Inc. is moving forward with a weight-loss pill as the drugmaker seeks to crack the multibillion-dollar market for obesity medications and mount a comeback from its post-pandemic malaise.
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Apple Inc. has avoided the threat of fines from European Union regulators by agreeing to open up its mobile wallet technology to other providers free of charge for a decade.
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Costco Wholesale Corp. is boosting its membership fees for the first time since 2017, raising the charge for a basic membership to $65 a year from $60.
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Royal Bank of Canada is shuffling its leadership ranks and breaking its largest division into two, in one of the biggest reorganizations of Dave McKay’s decade-long tenure as chief executive officer.
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Tata Consultancy Services Ltd. reported profit that topped analysts’ estimates, signaling corporations are resuming spending on projects to take advantage of technologies such as artificial intelligence.
Key events this week:
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China trade, Friday
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University of Michigan consumer sentiment, US PPI, Friday
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Citigroup, JPMorgan and Wells Fargo’s earnings, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 was little changed as of 9:30 a.m. New York time
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The Nasdaq 100 was little changed
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The Dow Jones Industrial Average was little changed
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The Stoxx Europe 600 rose 0.6%
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The MSCI World Index rose 0.5%
Currencies
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The Bloomberg Dollar Spot Index fell 0.6%
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The euro rose 0.5% to $1.0884
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The British pound rose 0.5% to $1.2917
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The Japanese yen rose 2% to 158.53 per dollar
Cryptocurrencies
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Bitcoin rose 2.4% to $58,804.06
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Ether rose 2.7% to $3,180.83
Bonds
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The yield on 10-year Treasuries declined 10 basis points to 4.19%
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Germany’s 10-year yield declined six basis points to 2.47%
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Britain’s 10-year yield declined four basis points to 4.09%
Commodities
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West Texas Intermediate crude fell 0.3% to $81.84 a barrel
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Spot gold rose 1.6% to $2,408.16 an ounce
This story was produced with the assistance of Bloomberg Automation.
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