The consumer price index fell by 0.1 per cent last month, defying expectations of a 0.1 per cent rise, leaving the annual rate at 3 per cent, down from 3.3 per cent.
On a three-month annualised basis, core CPI has dropped to 2.1 per cent, nearing the Fed’s “comfort zone” and potentially paving the way for rate cuts.
US government bond yields experienced a sharp decline in the wake of the data release, reflecting market expectations of over a 90 per cent likelihood that the Fed will reduce the Fed funds rate by 0.25 per cent in September.
Seema Shah, chief global strategist at Principal Asset Management, noted that Thursday’s data reveals multiple components of inflation easing to their lowest levels since COVID-19.
“Not only should this give the Fed confidence that 1Q’s hot CPI readings were just a bump in the road, but it should reinforce Fed chair Powell’s most recent comments that the balance of risks is shifting,” Shah said.
“Having said that, a July policy cut is still off the table. Not only would it spark questions of ‘What do they know about the economy that we don’t know?’ but the Fed still needs to gather additional evidence of waning price pressures to be absolutely certain of the inflation path.
“By September, however, they will likely have a sufficient series of data prints to support a rate reduction.”
CBA’s Harry Ottley said, “A 25 bp cut is now close to fully priced for September”.
Following the announcement, Ottley observed a significant bond rally with marked declines in yields, particularly at the shorter end, while stocks saw sharp declines as investors favoured the short end of the bond market. Concurrently, the AUD/USD initially rose to nearly 0.6800 in response to the inflation data but retreated to 0.6760, suggesting resistance at these elevated levels.
AMP’s chief economist, Shane Oliver, also anticipates a cut in September followed by another later this year. Taking to social media platform X, Oliver said, “the risk is now a third cut”.
In his weekly commentary, Oliver reiterated that the likelihood of a September commencement for rate cuts is strengthening, supported also by recent remarks from chair Powell, made ahead of the CPI report.
Namely, Powell recently acknowledged progress on inflation, hinting at rate cuts ahead conditional on the Fed seeing “more good inflation” data.
Turning to Australia, Oliver remarked that the downward trend in US inflation is a positive development for the local predicament.
“Of course, Australian inflation and the RBA don’t always just follow other countries, but Australia was part of the global upswing in inflation (and hence rates) and there is no reason to expect it to be radically different on the way down,” said Oliver.
“Particularly with wages growth here not reaching the level of other countries. And the US experience with three hot monthly inflation readings followed by a return to softer readings suggest we may see the same here after three hot inflation readings from March to May.
“Of course, June quarter CPI will be key to what the RBA does at its August meeting, but our view remains that the RBA will leave rates on hold ahead of rate cuts starting in February next year.”
The RBA is scheduled to meet on 6 August.
Speaking to InvestorDaily earlier this month, Oliver said he doesn’t expect the central bank to raise rates unless there is a significant surge in CPI.
“I think the likely scenario is the RBA holds, for the simple reason we are seeing a lot of soft economic data in Australia.”
As at the 11th of July, the ASX 30 Day Interbank Cash Rate Futures August 2024 contract was trading at 95.61, indicating a 25 per cent expectation of an interest rate increase to 4.60 per cent at the next RBA board meeting.
