CPI Shows Comprehensive Cooling

On Thursday, July 11, the Labor Department released data showing that the year-on-year growth rate of the CPI for June slowed from 3.3% in May to 3%, below the expected 3.1%. This is the lowest growth rate since June of last year and marks the first negative month-on-month decline since May 2020, with a decrease of 0.1%.

The core CPI grew by 3.3% year-on-year, below the expected 3.4%. Month-on-month growth was 0.1%, the smallest increase since August 2021. This unexpected slowdown in data has undoubtedly injected a strong dose of confidence into the market, indicating a comprehensive cooling of inflation.

Specifically, both goods and services inflation rates declined year-on-year, with goods prices showing a new low since 2020, dropping by 1.8% year-on-year.

Notably, housing inflation within the core CPI is also accelerating its slowdown.

Year-on-year, the housing inflation rate for June dropped to 5.16%, down from 5.41% in May, marking the lowest level since May 2022. Rent inflation rose by 5.07% year-on-year, down from 5.30% in May, the lowest since April 2022.

Rate Cuts Incoming?

Following the data release, Treasury yields plunged. The latest 10-year Treasury yield hit a nearly three-month low.

The dollar and gold also showed corresponding reactions. However, due to market adjustments, recently strong U.S. tech giants like Nvidia, Apple, and Microsoft experienced significant declines. Conversely, long-stagnant small-cap stocks saw a retaliatory surge, with the Russell 2000 index jumping 3.6% in a single day. Meanwhile, the previously soaring Nasdaq index fell by 2%, and the S&P 500 index dropped by 1.4%.

Data shows that this day’s performance marked the largest single-day performance gap between the Russell 2000 index and the Nasdaq since 1986.

On the other hand, the market has increased the probability of the Federal Reserve cutting rates starting in September from around 70% before the data release to over 90%. Only 7.3% believe there will be no rate cut.

Additionally, the market expects 2-3 rate cuts for the entire year, with a 46.6% probability of three rate cuts.

Economists and market observers have also expressed confidence in the Fed’s rate cuts, with JPMorgan moving their expected rate cut timeline from November to September. Amidst the chorus of rate cut expectations, it seems only a matter of time.

Trump as an X-Factor?

However, political uncertainties could complicate the arrival of rate cuts.

Reports indicate that if the Fed chooses to cut rates in September, it could be perceived as a favor to the incumbent President Biden. If Trump wins the election in November, it could trigger political retaliation.

Although Powell was initially appointed as Fed Chair by Trump and is often described as a registered Republican, Trump still views Powell’s decisions as politically motivated. Congressional Republicans have also warned Powell against cutting rates before the November election. House Financial Services Committee Chairman Henry stated, “Everyone wants a rate cut… but I think a September rate cut would be seen as political.”

Furthermore, Congressional Republicans have warned Powell against cutting rates before the election, lest it be seen as a political act. Fed Chair Powell insists that decisions will be strictly based on data and economic outlook, not political factors.