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US Inflation Eases, Supporting Rate Cut Expectations

Consumer price growth slowed more than anticipated in the United States last month, putting the Federal Reserve on a heading toward easing policy in September. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 3.3 percent in June from the same period last year – the smallest gain since April 2021 – and was up just 0.1 percent on a month-over-month basis. This undershot consensus estimates among economists polled by the major data providers ahead of the release, which were set at 3.4 percent and 0.2 percent, respectively.

On a headline all-items basis, prices climbed 3 percent on a year-over-year basis, down from the 3.3 percent pace set in May, and were down -0.1 percent from the previous month. Americans paid 2 percent less for energy on a month-over-month basis, with lower gasoline prices again pulling the headline print downward, while the shelter sub-index climbed 0.2 percent, with “owners equivalent rent” – a largely theoretical measure – increasing 0.3 percent.

Treasury yields are falling across the curve, with 2- and 10-year instruments dropping by more than 10 basis points as investors double down on the likelihood of a rate cut in September. The dollar is tumbling, equity markets are shooting higher and risk-sensitive currencies are advancing across the foreign exchange markets.

Bottom line: This morning’s print delivered more of the “really good” data Fed Chair Jerome Powell has been looking for, helping set the stage for a dovish turn from other officials in upcoming appearances. We continue to favour a September move off the blocks for the central bank’s easing cycle, and think that – if incoming data continues to illustrate slowing momentum in price drivers and job markets – the first explicit rate cut guidance could be provided at the central bank’s meeting at Jackson Hole in late August. Given how much now depends on the July and August non-farm payrolls prints, volatility around data releases could be exacerbated through the summer months, but shrinking interest rate differentials are likely to favour continued underperformance in the dollar.

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