According to the Bureau of Labour Statistics (BLS), US inflationary pressures eased more than expected in the month of June, reinforcing the likelihood of Fed rate cuts this year. Markets also welcomed weekly unemployment claims, which fell by nearly 20,000 to 222,000 for the week ending 6 July, with continuing jobless claims pretty much stable at 1.852 million (for the week ending 29 June). Albeit a meaningful drop in claims, attention was squarely on the US inflation report.

Following the inflation release, US Treasury yields fell alongside the US dollar (USD), witnessing a meaningful move to the downside, and US equity index futures caught a strong bid. Unsurprisingly, this also triggered a dovish rate repricing and essentially shelved the idea of a rate hike. Overnight Index Swaps (OIS) traders priced in as much as 150 basis points of easing at the beginning of this year. The Fed, however, has maintained the Fed funds target rate at 23-year highs of 5.25%-5.50%, with swaps traders now pricing only 60 basis points of easing (up from 49 basis points before the release of the latest US inflation data).

US Headline CPI Inflation Slows to +3.0%

The year-on-year headline US Consumer Price Index (CPI) rose +3.0% in June, down from May’s reading of +3.3% and was also softer than Bloomberg’s median estimate of +3.1%. Excluding energy and food components, June’s so-called year-on-year core inflation data slowed to +3.3%, less than the market’s median estimate and May’s value of +3.4%.

The month-on-month headline June CPI print fell by -0.1% from May’s release of 0.0% (consensus: +0.1%), while monthly core inflation cooled to +0.1%, less than the +0.2% expected and down from May’s reading of +0.2%.

Digging deeper into the release, factors behind the overall slowdown in CPI inflation was a sizeable drop in gasoline prices, which fell by -3.8% In June, following declines of -3.6% in May, with the overall energy index falling -2.0% – matching May’s fall. Shelter prices also finally demonstrated signs of cooling, rising +0.2% in May, its lowest level in many years, as well as owners’ equivalent rent of residences slowing by +0.3% in June, its lowest value since 2021.

Will the Latest Inflation Print Be Enough for the Fed?

At the two-day testimony this week, Fed Chair Jerome Powell noted that the Fed would require ‘more good data’ to strengthen the central bank’s confidence that inflation is moving sustainably towards the 2.0% inflation target before reducing the policy rate. The latest numbers could be enough to trigger the beginning of an easing cycle for the Fed.

In his latest appearance, Powell sidestepped offering a timeline for the first rate cut. However, the broad miss across all key measures today could tip the scales in favour of a rate reduction in September, and the market seems to be aligned with that outlook.

Given the latest inflation report demonstrating clear signs of disinflation progress, Fed officials will now be looking more closely at the labour market, particularly with the unemployment rate recently ticking higher to 4.1%, the highest rate since 2021. Powell also recently commented that inflationary pressures are ‘not the only risk we face’. The Fed Chair highlighted: ‘This is no longer an overheated economy […] If we loosen policy too late or too little, we could hurt economic activity. If we loosen policy too much or too soon, then we could undermine the progress on inflation. So we’re very much balancing those two risks’.

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