The Federal Reserve’s preferred inflation measure slowed as expected in May, bolstering odds on a rate cut before the November presidential election. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising just 0.1 percent in May from the prior month, matching market forecasts. On a year over year basis, core price growth fell to 2.6 percent, down from 2.8 percent in April, aligning with economist estimates.

The overall personal consumption expenditures index flatlined relative to the prior month, rising 2.6 percent from a year ago. Personal income rose 0.5 percent month-over-month, accelerating from April’s 0.3-percent pace. Inflation-adjusted household spending climbed 0.3 percent, matching the prior month, and meeting expectations. The savings rate, which can offer a preview of future spending capacity, jumped to 3.9 percent from a revised 3.5 percent, but remains down from 5.2 percent a year ago as lower-income consumers spend beyond their means.

Jerome Powell’s favoured “supercore” inflation measure – core services excluding housing rents – decelerated to 0.1 percent month-over-month, the slowest since August, incrementally easing to 3.4 from 3.43 percent year-over-year in April.

Treasury yields are pushing lower across the curve as traders move to upgrade odds on an imminent easing cycle, and the dollar is moving lower against its major rivals on a narrowing in relative rate differentials. Taken in combination with incoming evidence of a slowing in labour markets and weaker consumer spending, we think the Federal Reserve will begin laying the foundations for a September rate cut in July, with explicit easing signals coming as soon as the Jackson Hole Economic Symposium on August 22.

Separately, the Canadian economy exhibited clear signs of deceleration in May, but avoided a more precipitous decline, keeping policy rate expectations in line with pre-release levels. Preliminary numbers released by Statistics Canada this morning show real gross domestic product rising just 0.1 percent in May as modest growth in the real estate, finance and manufacturing sectors marginally offset weakness in consumer spending-driven areas of the economy. This came after a 0.3-percent expansion in the prior month – in line with the advance estimate – and put growth on track toward a 1.8-percent annualised expansion in the second quarter, below the Bank’s 2.9-percent forecast from earlier this year, but better than many private forecasters had expected.

As expected, domestic developments aren’t acting as major drivers for the loonie: the Canadian dollar is climbing as the greenback slumps more broadly.